23.03.2012

By Simon Miller

The European Securities and Markets Authority (ESMA) has slammed credit rating agencies (CRA) for failures in their processes.

ESMA examined Standard & Poor’s. Moody’s Investors and Fitch Ratings and found there were several shortcomings and areas for improvement.

Specifically, the authority found fault with the transparency of rating methodologies, disclosure and presentation of ratings, and IT controls. It also criticised the recording of core internal processes and the adequacy of resources devoted to internal control functions and analytical business lines.

The findings will be welcomed by the European Union, France and Germany which have criticised rating agencies over their actions and failure to warn of the financial crisis.

The authority said it had decided to focus on the three ratings agencies, focusing particularly on three specific credit rating classes (sovereign ratings, bank ratings and covered bond ratings), as it considered these to be significant, “given the current market trends, the degree of credit linkage and the interdependence of these products”.

ESMA added that it had not determined whether any of the observations in the report constitute a breach of the CRA Regulation. ESMA will follow-up on the observations through risk mitigation plans for each individual CRA in the first half of 2012.

The authority’s chairman Steven Maijoor commented: “The publication of our supervisory report enables the public to be informed on ESMA’s day-to-day activity in the supervision of credit rating agencies. Based on the first on-site examination, this report sets out ESMA’s views on common issues affecting credit rating agencies’ activities and is an important step towards the promotion of the quality of ratings.”

"Fitch is fully committed to compliance and confident that we will meet the requirements outlined by ESMA today," Fitch said in a statement.