Ratings are not a satisfactory basis for determining regulatory capital, said Europe’s Economic and Social Committee

The European Economic and Social Committee (EESC) is delighted about plans to regulate and register credit rating agencies.

‘The credit rating agencies played a defining role in the development and credibility of structured products that have turned out to be toxic and have destroyed hundreds of billions of dollars worth of assets,’ said the Committee.

EESC rapporteur Peter Morgan stressed that rating agencies must be a legal entity established in the Community and that the home Member State should be the regulator.

Furthermore, the Committee urged EU regulators not to place undue reliance on ratings, especially in the light of recent experience, where certain ratings have been found to be worthless.

The proposed regulation allows for withdrawal of registration and the initiation of criminal proceedings. ‘Penalties must apply to cases of gross professional misconduct and lack of due diligence and be effective, proportionate and dissuasive,’ said Morgan.

Ratings themselves are not actually a satisfactory basis for determining regulatory capital.

‘Steps must be taken to hold rating agencies responsible for their ratings,’ said the Committee. ‘Genuine errors can be tolerated but failures of due diligence cannot.’