Deven Sharma, the head of Standard & Poor’s, has strongly defended the ratings agency model and urged coordinated global regulation ahead of efforts next month to establish legal supervision for the industry in Europe.
“We offer opinions on the creditworthiness of [issuers] and [...] we want consistent rules adopted by all regulatory authorities,” he told Emerging Markets at the sidelines of the firm’s breakfast seminar in Washington yesterday. “We are transparent and we just provide guidelines on the likelihood of default.”
At the onset of the US leveraged loan crisis in August 2007, credit rating agencies were blamed for the turmoil in the structured finance industry. They have been accused of poor judgements, limited transparency, and of having a conflict of interest in their relationships with issuers, bankers and investors.
Michel Prada, head of the French securities regulator AMF, told Emerging Markets that “some kind of supervision of activities of these unregulated entities would have provided some oversight” in stemming the proliferation of complex debt products.
David Ruder, former head of the Securities and Exchange Commission (SEC), said: “I can’t believe that [the agencies] got ratings of mortgage-backed securities so wrong. And now we are seeing so many defaults, their role is going to be scrutinised more.”
Charlie McCreevy, the European Commission’s international market commissioner, is due to present proposals on rating agency regulation to the European parliament next month.
One controversial idea is to empower regulators to intervene on credit judgements when it is deemed that investor interests are at risk or that there is a danger of market disruptions. But Sharma argued that the agencies’ analytic integrity and “independence of credit opinions” must be preserved.
The SEC advocates a lighter touch principles-driven regulatory system. This opens up the prospect of divergent regulatory responses to the industry affecting the consistency of ratings.
Sharma said that principles advanced by the International Organization of Securities Commissions (IOSCO) on rating agencies’ transparency, disclosure, and role in the global market place, should guide the European Commission.
But Prada said that more prescriptive rules are possible in Europe. “It’s relevant for regulators that self-regulation is not sufficient. Self-discipline is not contradictory with supervision.”
He suggested that a single Europe-wide supervisor is necessary. “We believe that monitoring is needed at the EU level. I propose that monitoring could be done at the Committee of European Securities Regulators level and then enforced by national regulators.”