Jul 09 2008 Peter Elstob
European's finance ministers yesterday reviewed the progress towards implementing Ecofin's "road map" on market transparency and the role of rating agencies in the wake of the past year's turmoil. They stressed that if market confidence is to return banks must make "prompt and full disclosure" of their exposures to distressed assets and off-balance-sheet vehicles, as well as of their write-downs and losses. The upcoming mid-year results will therefore need to be "as comprehensive, legible and comparable as possible," they said.
Ecofin backed two recent reports from the Committee of European Banking Supervisors; on banks' transparency in relation to business and products affected by the turmoil, and on the valuation of complex and illiquid financial instruments. It also called on banks to follow CEBS's guidance on disclosure practices, asked CEBS and the individual national supervisors to monitor their implementation when mid-year results are published, and to report back to Ecofin in November. CEBS is due to review its disclosure recommendations next year, within the scope of pillar three of the Capital Requirements Directive.
As expected, Ecofin welcomed the industry initiatives to improve the transparency of both the primary and secondary securitisation markets, asking the European Commission to monitor their implementation closely, and to report back in early September.
On rating agencies, Ecofin said that addressing concerns about the transparency of the rating processes, risk of conflicts of interest related to CRAs' remuneration models, and about accountability and the quality of ratings was "of high importance". It backed the Financial Stability Forum's recommendations (PDF), including differentiated ratings (which have met with resistance from the agencies), and improved information on the risk characteristics of structured products.
The ministers also backed the International Organisation of Securities Commissions' revision of its Code of Conduct (PDF) — which they described as the "minimum benchmark" for addressing concerns about CRAs' role in structured finance — and the reports by the Committee of European Securities Regulators and the European Securities Markets Expert Group (PDF), which both proposed stronger oversight of CRAs.
They agreed with the commission's view, as voiced in a recent speech by internal market commissioner Charlie McCreevy, that the steps beyond the IOSCO code that CRAs had taken to address concerns about their governance and transparency were insufficient, and that "regulatory changes" might be needed. They also supported, "without prejudice to consideration of its practical application", the commission's idea for an EU registration system for CRAs. The ministers also backed "an enhanced European approach", which appears to be code for facilitating the establishment of a CRA that is not US-owned.
