Tuesday, May 06, 2014

European Commission issues Report on Feasibility of Smaller Credit Rating Agencies

In a report to the E.U. Parliament, the European Commission examined the feasibility of establishing a network of smaller credit rating agencies throughout the E.U. The report assesses how the establishment of such a network could contribute to the strengthening of smaller credit rating agencies, facilitating their growth to become more competitive market players. A number of distinctly smaller credit rating agencies have emerged in Europe after the enactment of the CRA Regulation. These smaller rating agencies  operate with a clear focus on specific industry sectors, financial market segments, or specific geographical area, thus responding to specialized market needs. The Regulation on credit rating agencies requires them to be registered and supervised by the European Securities and Markets Authority (ESMA). The legislation also subjects them to stringent independence rules as a precondition for the provision of rating services.

The Commission believes that an integrated network of smaller rating agencies would have a wider scope and deeper level of cooperation. The Commission has assessed, with contributions from representatives of smaller CRAs, a number of possible areas which could be covered. As a result, the following issues have been identified by this assessment as areas where an integrated network could potentially have an added value: the development of a common data platform for underlying information used for developing ratings, the design and use of common methodologies, and the sharing of expert knowledge and best practices on a wide range of topics such as internal controls.
One of the problems with an integrated network is that it could lead to increased anti-competitive
behavior contrary to the European Union's objectives to enhance diversity in the rating industry.
The creation of a cooperation network was assessed as an alternative to the integrated network. It would be a forum for smaller CRAs, which would enable the establishment of a structure for ular exchange and cooperation among smaller rating agencies.