EU attacks US-based credit rating firms

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Breanna Deutsch Contributor
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The European Union’s markets watchdog released a report saying they may take “enforcement action” against the three leading credit rating firms assessing government bonds, The Wall Street Journal reported.

The Paris-based European Securities and Markets Authority (ESMA), said in a statement on Monday that they had filed a study “identifying a number of deficiencies in the processes for producing and issuing sovereign ratings at the three largest credit rating agencies (CRAs), Fitch Ratings, Moody’s Investors Service and Standard & Poor’s.”

ESMA’s report was a result of an investigation lasting from February to October 2013 that focused on “the governance and organisation of sovereign rating activities, the adequacy and expertise of allocated human resources, the disclosure of rating information to the public, and ensuring its confidentiality before disclosure.”

According to the study, the U.S.-based firms were flawed or needed to improve in all of the investigated areas.

The European watchdog group says that it has not yet confirmed that the firms’ actions breached the EU’s regulations, but warned that further investigations “could lead to supervisory or enforcement actions.”

This is not the first attack the big three credit rating firms have faced from the European Union. In recent years, euro-zone officials have blamed them for aggravating the financial crisis when they downgraded some of the region’s sovereign debt.

In response to the financial crisis, the European Union passed three sets of new legislation in an effort to tighten regulations on the firms. Some of the new regulations included a push to limit the dominance of the leading rating firms; restrictions on when ratings firms can change ratings of sovereign-bonds; efforts to make it easier to file lawsuits against the firms; and moves to stop firms from rating bonds issued by companies that are significant shareholders.

A spokeswoman for Moody’s told the Journal the firm is “committed to complying with the European regulation and effectively managing any potential conflicts of interest.”

A spokesman for Fitch said the company is “confident” that it acted within EU regulatory standards, but it promises to move “swiftly to address any issues identified in the report.” Standard & Poor’s said it is also “committed to the highest standards” in its rating procedures and is “continually enhancing” its processes.

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