* Curbs on banks' use of ratings proposed on July 20
* Funds, insurers to follow by year end
* UK MEP Bowles says don't shoot the messenger
* Funds industry leery about costs for smaller players
By Huw Jones
PARIS, July 11 Banks in the European Union face
curbs on how much they can depend on ratings from credit
agencies to calculate the size of their capital safety cushions.
Michel Barnier, the EU's financial services chief, said he
will make the proposals as part of his reform to bring EU bank
capital requirements in line with a global accord known as Basel
III that will increase the size of capital buffers.
"To limit overreliance, we will be strengthening the
requirement for banks to carry out their own analysis of risk
and not rely on external ratings in an automatic and mechanical
way," Barnier said in a speech.
"We will also make other concrete proposals before the end
of the year to limit over-reliance to deal with insurance, asset
management and investment fund sectors," Barnier also told the
European Securities and Markets Authority (ESMA).
The draft law is due to be published on July 20.
Peter De Proft, director general of the European Fund and
Asset Management Association (EFAMA), told Reuters many
investment firms already do their own credit analysis. "It will
be more difficult for the smaller ones," De Proft said.
Moody's angered the EU this month by downgrading Portuguese
debt despite the country securing an EU bailout.
Barnier said the "absolute minimum" must be to improve
transparency in how agencies reach such decisions.
"That is why we should ask ourselves ... whether it is
appropriate to allow sovereign ratings on countries which are
subject to an internationally agreed programme," Barnier said.
Such a ban will be discussed by EU finance ministers
shortly, he added.
Sharon Bowles, the UK Liberal chairman of the European
Parliament's economic affairs committee, cautioned against
seeing ratings agencies as the "fount of all evil" in the euro
zone's debt crisis.
"I just think they are being shot as the bringer of bad news
during the sovereign debt crisis. I am not entirely convinced
the system is broken," Bowles told the ESMA meeting.
The continued zero-weighting of all sovereign debt when it
comes to calculating bank capital has played a much more
damaging role in the crisis by not allowing markets to
discipline weaker debt, Bowles said.
The United States' Dodd-Frank Act is also forcing U.S.
regulators to remove references to the use of credit ratings in
determining bank capital.
It is part of a wider effort by the world's 20 leading
economies (G20) to regulate credit rating agencies whose
reputation was tarnished in the financial crisis for failing to
warn investors in "toxic" securitised products fast enough.
Barnier will also sound out the G20 to see if it could also
take fresh initiatives to regulate credit rating agencies due to
the international nature of the business.
"We need to be more demanding when it comes to how credit
rating agencies rate sovereign debt," Barnier said.
The EU has already approved two sets of laws to regulate the
sector, forcing agencies to obtain authorisation to operate in
the 27-nation area. The ESMA is expected to need several more
months to issue licenses to the "Big Three" -- Moody's ,
Fitch and Standard & Poor's .
Barnier may also propose forcing agencies to allow a
government "to check the accuracy of the data used by an agency
in advance of any downgrading.
"European regulation could allow for investors to take
agencies to court when there has been negligence or violation of
applicable rules," Barnier added. "We have not closed the door
to going further."
(Editing by Greg Mahlich and David Holmes)