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Reform of Credit Rating Agency Regulation in Europe: An End-investor Perspective

by Joanna Cound, Managing Director, and Stephen Fisher, Director, BlackRock

Ratings provide a benchmark or a reference point that investors use to evaluate a security or issuer’s potential eligibility for the inclusion of that investment in a portfolio. Without globally recognised standards for inclusion or exclusion, investor uncertainty about the credit quality of the investment could undermine the confidence of investors.

The financial crisis brought into sharp focus a number of weaknesses in the Credit Rating Agency (CRA) business model. Regulators, globally, have sought to address these weaknesses in the CRA business model and to modify investor behaviour by discouraging an over-reliance on ratings.

In Europe, the third reform of CRA regulation (“CRA3”) since the financial crisis is currently underway. BlackRock supports the rationale behind many of the proposals in the CRA3 package but we are nonetheless concerned that key elements of the package could impair the investment performance and choice of our clients with adverse effects for both European institutional and retail investors including households, pensioners and savers.

This article provides background on the use of ratings in the investment process, establishes the case for further reform of CRAs and the ratings process and summarises concerns expressed by investors with respect to the CRA3 proposal in Europe.