Darling Calls on EU to Curb Reliance on Credit-Rating Firms

By Gonzalo Vina

July 8 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling wants European Union policy makers to curb their reliance on credit-rating firms, joining his counterparts in calling for stricter industry oversight, a U.K. Treasury official said.

Darling, responding to record losses on subprime-mortgage bonds, will tell EU finance ministers meeting in Brussels today that their excessive use of ratings by companies such as Standard & Poor's and Moody's Investors Service discourages proper risk assessments, the official told reporters.

The current use of ratings is ``too hard wired'' in EU policy making, the official added. For example, a directive enacting Basel II bank-capital rules requires banks to use recognized ratings to value their assets, the official said.

EU finance ministers will call for credit-ratings firms to register with EU authorities, an effort to increase control in response to the credit-market turmoil of the past year, according to a draft statement disclosed last week.

In the U.S., the Securities and Exchange Commission plans new rules to prevent conflicts of interest at credit-rating companies and help investors distinguish rankings on asset- backed securities from other types of debt.

The SEC has proposed that raters be barred from guiding investment banks on gaining top rankings for structured-finance offerings. It may also recommend that companies use symbols for asset-backed securities that differ from corporate and municipal debt ratings.

McCreevy Plan

The EU proposal, meanwhile, will bolster EU Financial Services Commissioner Charlie McCreevy's plan to require rating companies to register with regulators in the EU, allowing authorities to oversee the business. French Finance Minister Christine Lagarde, who will lead today's meeting as France holds the EU's rotating presidency, called for such a system in May.

Nonbinding measures by the rating companies aren't sufficient, the ministers will say today, while they'll welcome moves by regulators and the industry to stiffen a code of conduct and set additional procedures for assessing asset-backed securities.

U.K. Prime Minister Gordon Brown in April asked U.K. bank executives to improve financial reporting and adopt more systematic methods for writing down bad debts.

The world's largest banks and securities firms have absorbed almost $400 billion of losses and writedowns since the start of 2007 after home loans made to the least creditworthy borrowers went bad. Pension and money-market funds also invested in mortgage bonds because the securities offered higher returns than government bonds with the same AAA rankings.

To contact the reporter on this story: Gonzalo Vina in London gvina@bloomberg.net