The European Union announced plans today to create a watchdog to control credit rating agencies and launched a review of the way banks are managed in a bid to accelerate reform of the financial sector.
The executive European Commission outlined its plans at a news conference as frustration grows with the slow progress in regulating an industry that has borne much of the blame for the global economic crisis.
'Today the Commission is launching the final push to complete the EU's financial services reform,' the European Commission President Jose Manuel Barroso said. He is head of the body that will propose laws to change the way banks do business in Europe.
Michel Barnier, the EU commissioner in charge of the shake-up, said a watchdog would be created to control the credit rating agencies - Standard & Poor's, Fitch and Moody's - which have been criticised during the crisis for downgrading European countries.
Barnier also launched a review of bank management, suggesting directors should sit on a maximum of three management boards and promising to renew efforts to curb banker pay.
'If we are to prevent future crises, financial institutions themselves need to change,' he said.
Barroso, Barnier and Economic and Monetary Affairs Commissioner Olli Rehn appeared together at the news conference to show their determination to change the financial services industry.
G20 world leaders are meeting later this month in Canada and the ability of Europe's representatives to speak with one voice will help determine its ability to influence the reshaping of global finance.
Barnier said he would put credit rating agencies under the watch of a new pan-European supervisor with power to withdraw licences to do business if new rules on transparency are broken.
Rating agencies will be asked in December to provide more information about how they decide the creditworthiness of countries or companies. Although they will not be asked to justify individual decisions, they will need to outline what methods they use to make them.
A European watchdog being set up to monitor their work will have the power to demand fines and strong powers to take away their licence.
Some European officials, frustrated with downgrades of states as the euro zone struggled to win back investors' confidence, hope this will tighten control of Moody's, Standard and Poor's and Fitch.
But some people in the financial industry fear it could be used to interfere with its ratings.
Since taking his post in February, Barnier has pledged tough action on issues from bankers' pay to demands that lenders hoard more capital. So far, however, he has made only one concrete proposal - to introduce a bank levy.
He is also under pressure to produce new rules to control speculators, accused of exacerbating Greece's borrowing problems by betting on its debt. EU sources have said Barnier's proposal for a law to demand closer monitoring of the opaque derivatives market will now be delayed from July until September.
US investigators grill credit rating agencies
Credit rating agencies came under fire for their role in the global financial crisis today, as senior US industry figures - including mega-investor Warren Buffett - faced a grilling from US investigators.
Answering allegations that ratings firms helped propel the sale of risky investments which poisoned the global financial system, some senior officials from Moody's Investor Service admitted mistakes were made, but denied any wrongdoing.
Moody's, Standard & Poor's and Fitch are accused of blithely awarding complex mortgage-backed securities their lucrative 'AAA' investment ratings simply to net more business.
These top ratings are often seen as a seal of approval by investors and a sign that a company, country or debtor will pay back borrowed cash on time and in full.
Raymond McDaniel, Moody's CEO, told a Congress-appointed independent panel it was deeply disappointing that the firm failed to sniff out how risky mortgage-backed investments were, but said steps had been taken to improve the system.
'Moody's is certainly not satisfied with the performance of these ratings,' he said. 'There has been an intense level of self evaluation within our organisation,' he added.
The ratings agencies have come under fire from US lawmakers who are putting the final touches to financial reforms that would see stiffer curbs on how the firms do business. Criticism has focused on the fact that agencies are paid by the same firms they rate.
