EU Prepares Law To End Influence Of Rating Agencies, Tells Banks To Police Themselves

Tyler Durden's picture

The schizophrenic EU once again confirms it has forgotten to take its daily dose of Geodon. Reuters reports that banks in the European Union face curbs on how much they can depend on ratings from credit agencies to calculate the size of their capital safety cushions. Michel Barnier, the EU's financial services chief, said he will make the proposals as part of his reform to bring EU bank capital requirements in line with a global accord known as Basel III that will increase the size of capital buffers. "To limit overreliance, we will be strengthening the requirement for banks to carry out their own analysis of risk and not rely on external ratings in an automatic and mechanical way... We will also make other concrete proposals before the end of the year to limit over-reliance to deal with insurance, asset management and investment fund sectors," Barnier also told the European Securities and Markets Authority (ESMA). Translation: banks will be told to .... police themselves. As for the basis of this move, it is all too clear: remove the influence of the ratings agencies on the fact that the European ponzi is unravelling faster than Lady Gaga's costume at next year's VMA. But wait, what about that AAA rating on the "CDO at the heart of the Eurozone." Oh, well, since that's an AAA, they are fine with that. Of course, if the CRA's say enough, and actually slap a rating that is truly appropriate with this reverse synthetic debt contraption, it's game over.

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The draft law is due to be published on July 20.

Peter De Proft, director general of the European Fund and Asset Management Association (EFAMA), told Reuters many investment firms already do their own credit analysis. "It will be more difficult for the smaller ones," De Proft said.

Moody's angered the EU this month by downgrading Portuguese debt despite the country securing an EU bailout.

Barnier said the "absolute minimum" must be to improve transparency in how agencies reach such decisions.

"That is why we should ask ourselves ... whether it is appropriate to allow sovereign ratings on countries which are subject to an internationally agreed programme," Barnier said.

Such a ban will be discussed by EU finance ministers shortly, he added.

Sharon Bowles, the UK Liberal chairman of the European Parliament's economic affairs committee, cautioned against seeing ratings agencies as the "fount of all evil" in the euro zone's debt crisis.

"I just think they are being shot as the bringer of bad news during the sovereign debt crisis. I am not entirely convinced the system is broken," Bowles told the ESMA meeting.

The continued zero-weighting of all sovereign debt when it comes to calculating bank capital has played a much more damaging role in the crisis by not allowing markets to discipline weaker debt, Bowles said.

Complete. Unmitigated. Idiotic. Lunacy. Luckily for Europe, China is still out there lifting the barrage of EUR offers with its excess trade surplus and trillions in FX reserves.

Alas, even that will soon run out.