The European Parliament is slated to pass a law drafted in November that would restrict credit-rating firms’ ability to change sovereign-debt ratings.
It will be the third set of regulations for credit-rating firms since the 2008 crisis.
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Complex credit instruments’ top ratings were left intact during the 2007 credit meltdown, causing substantial losses for many US and European banks. Ratings firms came under criticism as a result.
Ratings firms also angered politicians with the timing of sovereign-debt downgrades just as economies were beginning to emerge from the region’s economic and debt crisis.
The restrictions will prohibit the automatic use of ratings by financial firms and EU institutions, restrictions on when downgrades can occur, on the dominance of ratings firms on the industry, and to prevent ratings of bonds owned by firms that are significant shareholders.
The legislation will also work to eradicate by 2020 references to ratings from most financial regulations.
While the new laws will also make it easier to sue ratings agencies, they are a signal that the EU is pulling back on efforts for the burden of proof to lie with the ratings agencies rather than the bond issuers.