EU's McCreevy warns ratings agencies on structured finance

By Ross Finley

LONDON, Feb 6 (Reuters) - European Union Internal Market Commissioner, Charlie McCreevy, warned on Wednesday that if credit ratings agencies did not correct the lack of distinctive ratings for structured finance products, he would take action.

"If the proposals are not forthcoming in coming months, I would not hesitate to move forward to have it addressed with regulatory action," McCreevy told the Society of Business Economists in London.

On Tuesday, credit rating agency, Moody's Investors Service, said it may change how it rates mortgage backed securities and other structured finance products, after criticism that its rating contributed to the global credit squeeze of the past six months when banks suffered losses as defaults rose on U.S. subprime mortgages.

Moody's, a unit of Moody's Corp (MCO.N), issued a "request for comment" on five options after regulators and investors said it was too slow to recognize credit deterioration in mortgage-backed and asset-backed securities, including collateralized debt obligations.

Rivals such as McGraw-Hill Cos' (MHP.N) Standard & Poor's and Fimalac SA's (LBCP.PA) Fitch Ratings have faced similar criticism.

"I am not going to be prescriptive today but I will say this: strong independent professional oversight of the credit professionals within the rating agencies...and of the operation of the ratings function is absolutely essential if market and regulator confidence is to be restored with respect to the effective management of the conflict of interest inherent in the rating agencies' business models," McCreevy told the audience in London.

In the wake of the near collapse of U.K. mortgage lender, Northern Rock NRK.L, during last summer's credit and liquidity squeeze in world markets, McCreevy also expressed concern about the lack of regulatory framework in Europe for dealing with bank failure.

McCreevy noted there were 44 institutions doing cross border banking in Europe, but it was not clear who the lender of last resort would be should any of them be hit by trouble.

"We have to find some kind modus vivendi to deal with these in a crisis situation," he said.

The issue had been highlighted again by the problems faced by French bank Societe General (SOGN.PA) last month after a rogue trader cost the bank 4.9 billion euros ($7.3 billion) in trading losses.

"It is inexcusable that the entire market value of a financial institution can be placed at risk by such abject carelessness on the part of leading European bank," McGreevy told his London audience.

"That institution failed to heed the warnings of a significant market counterparty and failed to learn the lessons that rogue traders have taught us about the checks, balances, and controls that must be in place for risk to be effectively managed and controlled."

Earlier this week, one of McCreevy's officials said McCreevy will propose changes to the "Basel II" banking regulation rules by October to reflect lessons from the recent market crisis.

Basel II, introduced in Europe this month is a globally agreed set of rules to ensure that banks have set aside enough capital to cover risks on their books.

The six-month long market turbulence has prompted policymakers to review the rules as banks have stunned investors with big writedowns on risky investments held off their books.

The United States will not introduce its version of Basel II rules until next year.