ESMA puts IT on the regulatory agenda for credit ratings agencies
The European Securities and Markets Authority has set out a series of tough new proposals for how credit rating agencies should be regulated. The proposals have reignited debate over the agencies, which have been controversial for their alleged role in the financial crisis.
ESMA is proposing that the credit rating agencies should be required to submit detailed information on their IT systems, internal risk management processes and business strategy, as well as other information such as revenues, staff headcount and even the minutes of internal board meetings. The regulator says that it is concerned about the risks posed by the agencies, and that its proposals will help it to monitor IT risk more effectively.
“Given the important role of IT in the delivery of timely and accurate ratings, ESMA would like to increase its oversight of IT operations and risk management,” said the report. “ESMA needs to have timely and complete information on a CRA’s performance and insight into the leadership of a CRA at executive and board level.”
Credit rating agencies have been the subject of intense scrutiny and controversy since the financial crisis, as they have been variously blamed for failing to spot the weakness of Lehman Brothers before it collapsed, causing havoc in the markets by downgrading the US in August 2011, and exacerbating the Eurozone debt crisis by downgrading Greece, Portugal and Ireland in spring 2010. The latter move was seen by EU officials as a damaging blow to those countries’ ability to borrow at the very moment when they were struggling to deal with deep recession and collapsing investor confidence. The situation became even more politically charged in January 2012, when S&P downgraded France, Austria and seven other Eurozone countries.
When ESMA was set up in 2011, one of its tasks was to regulate the activities of credit rating agencies as part of a ‘pushback’ from governments worried about the potential of organisations such as Fitch, Moody’s and S&P to exacerbate financial instability. The latest proposals by ESMA are part of a consultation, which will close on Halloween.
In the US, similar measures have been taken to rein in the credit rating agencies. In 2010, the Dodd-Frank Act created an office of credit ratings at the US regulator the Securities and Exchange Commission, which was tasked with making the agencies more accountable. The regulatory reform was also aimed at criticism that financial regulators had relied too heavily on the three main credit rating agencies, and that this approach was partly to blame for the financial crisis.