BRUSSELS (Reuters) - Credit rating agencies must voluntarily show they can avoid conflicts of interest or face new mandatory rules, according to a document that the European Commission is due to adopt on Wednesday.
“If these agencies prove unable or unwilling to act to address their weaknesses, then the EU and others will come forward with regulatory measures,” said the document, obtained by Reuters.
The document contains the EU executive’s proposals for changes needed to avoid a repeat of the financial market turmoil that began last August with defaults in U.S. home loans and triggered a global credit squeeze.
EU lawmakers are concerned that agencies are paid by the companies whose creditworthiness they rate. Many U.S. mortgage-related structured products sank in value despite an initially high rating.
Market watchdogs in the EU said earlier this month proposals that have emerged so far from industry to improve how it rates structured products were inadequate.
The Commission will also update accounting and valuation rules so it is clear what exposures banks have to investments parked off balance sheet, the document said.
Despite a credit squeeze seven months in the making, a full picture of total writedowns expected from banks is still not available.
The Commission will work with EU countries and the European Parliament to adopt by April 2009 legislative changes such as to Basel II rules that oversee how much capital banks must set aside to cover risks, the document added.
The document is largely an update on roadmaps agreed by EU finance ministers, the G8 countries and the international Financial Stability Forum late last year.
“The important role for the EU in contributing to a coordinated global response also reflects the emergence of the euro as a major currency,” the document said.
EU finance ministers will update themselves on the roadmap next week with conclusions sent to a March summit of EU leaders.
Regulators from across the world meet in Paris in May to agree a new voluntary code of conduct of best practice for credit rating agencies and it is likely to include a ban on helping to design and rate the same product.
The Commission will also encourage prompt and full disclosure of losses by financial institutions, improve EU early warning systems on financial stability and improve how national market watchdogs work together to oversee cross-border banks.
Efforts to adopt an EU wide approach to dealing with financial instability were well underway before the U.S. subprime crisis began.
Market turmoil has put pressure on lawmakers to face thorny issues such as who pays what when a cross-border bank fails.
(Reporting by Marcin Grajewski and Huw Jones; Editing by Dale
Hudson and David Holmes)
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