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Manifest Failure of US CRAs

Von Dr. Oliver Everling | 10.September 2008

The manifest failure of self-regulatory efforts, both formal and informal, to ensure high standards of independence, integrity and professional diligence relates not the European rating agencies, claims Feri EuroRating Services AG in Bad Homburg, Germany, near Frankfurt am Main (www.feri.de). „In our view only to some parts of the rating industry, namely to the US CRAs rating structured finance instruments. Our main objective is and always was to ensure that ratings are reliable and accurate pieces of information.“

Feri EuroRating Services gives utmost importance to mitigate any negative influence on the ratings resulting from conflicts of interest within their organization. „We follow highest standards of quality in the ratings and take nearly all measures to assure transparency of our agency.“

The European Commission had published on 31 July 2008 two consultation documents on CRAs seeking views from all interested parties by 5th September. The first document relates to the conditions for the authorisation, operation and supervision of credit rating agencies. The second proposes policy options in order to tackle what is felt to be an excessive reliance on ratings in EU legislation. In their answer, Feri EuroRating Services writes, „we share all objectives of your proposal, to ensure that CRAs avoid and manage appropriately any conflict of interest, to ensure that CRAs apply a high standard for the quality of the rating methodology and the ratings, and to increase the transparency of the CRAs.“

„We would highly appreciate if all CRAs would become as transparent as our organization“, says Dr. Helmut Knepel, board member of the rating agency. Since Feri assumes to meet the objectives of the Directive / Regulation in their daily work already, they believe additional compliance costs will be limited.

With respect to the excessive reliance on ratings in EU legislation, Feri sees little room to stay lax on rating agencies. „We see little alternative to a better regulation of the recognition process for rating agencies. It would not be appropriate to leave this field to the US lawmakers.“ The Credit Rating Agency Reform Act of 2006 requires applicant CRAs e. g. provide written certifications of not less than 10 qualified institutional buyers from the US. „There is no point in making European rating agencies meet this US requirement“, says the German-based rating agency. „Therefore European lawmakers will have to bring a similar law into force if European rating agency shall be given any chance to establish themselves with a European customer base.“

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