EUROPE - European Commissioner for internal markets DG Charley McCreevy is set to unveil proposals for the regulation of ratings agencies but has warned against blaming hedge funds and private equity for recent troubles in the financial markets.
McCreevy has been threatening the EC would regulate credit rating agencies unless they came up with suitable proposals to counter what official see as a conflict of interest in their remuneration by financial market players.
In a speech delivered yesterday - ahead of a discussion about the current financial market turbulence - in response to two reports by European Parliament rapporteurs, McCreevy said he is introducing an amendment to the existing capital requirements directive (CRD) on banks and will present his "ideas for regulating credit rating agencies" within the next few weeks.
"Few would have predicted one year ago that the situation in financial markets would be as serious as it is today," said McCreevy.
"And the effects of the crisis will continue to be felt for some time. It started with reckless selling of mortgages in the US, promoted by banks and others who did not care about lending standards because they could offload the loans to others through securitisation.
"Credit rating agencies then gave respectability to these high risk products by assigning them low credit default risk to them. Financial institutions around the world bought these up these products without it seems doing any serious risk assessment of their own," he added.
While McCreevy has himself been vocal in his disdain for credit rating agencies during the last year, he has rushed to the defence of hedge funds and private equity providers who have been under fire from the wider EU community for what people say is their part in the credit crunch and the month's turbulence in particular.
"We have had some interesting exchanges over the years about the roles of hedge funds and private equity. One thing I believe we can agree on is that they were not the cause of the current turmoil. It has turned out that it was the regulated sector that had been allowed to run amok with little understood securitisation vehicles," said McCreevy.
He continued: "I don't believe it is necessary at this stage to tar hedge funds and private equity with the same brush as we use for the regulated sector. Hedge funds and private equity are authorised and supervised entities throughout Europe. They are subject to the same market abuse disciplines as other participants in financial markets. They are bound by similar transparency and consultation obligations when investing in public companies. Exposure of the banking sector to hedge funds and private equity is subject to the Capital Requirements Directive."
While McCreevy may be looking to improve the CRD, one MEP is critical of activity so far and has suggested the only way to improve current regulation would be to effectively implement one European regulator.
"Alexander Radwan MEP of the German EPP-ED group, said in a European Parliament debate on the financial crisis a first reading agreement of the CRD would be possible if the Council [of Ministers] gave up its opposition to having a European supervisory system.
McCreevy also confirmed the EC is looking to implement transparency improvements regarding trading which will include a review of notification thresholds - a hotly-debated topic in several European countries concerning the level at which shareholdings and trading must be declared.
However, he stated the EC was not willing to discriminate against hedge funds and private equity firms, even though officials in some countries have declared such parties are damaging to local economies.
"We should acknowledge that hedge funds and private equity in many senses are not unique - other institutional investors have similar objectives and nowadays use similar techniques. If in that situation we imposed special obligations on hedge funds and private equity, this would result in discrimination of these categories of investors," argued McCreevy.