GERMANY – BaFin, the German regulator, has called on the country's pension funds to "come up with their own credit-risk assessments" as a means of tackling over-reliance on ratings agencies.

In a statement concerning two recently amended EU Directives on the issue, BaFin argues that insurers, reinsurers and occupational pension funds "must now come up with their own credit-risk assessments" and "must not solely or automatically rely on ratings for evaluating the solvency of a company or financial instrument".

The amendments in question went into effect in mid-June.

The first, No. 462/2013, amended the Directive on rating agencies, while the second, 2013/14/EU, amended the directive on supervising occupational pension vehicles "with respect to over-reliance on credit ratings".

The watchdog also points out that these amendments replaced a 2012 BaFin directive stipulating that internal ratings would be accepted only if an institution could demonstrate it had sufficiently trained staff for the exercise.

In a note on the new directives, law firm Cadwalader, Wickersham & Taft warns that the EU has plans to revise references to rating agencies in a range of directives and legal frameworks in the coming years.

It also points out that, according to the EU, national supervisory authorities will be required to "monitor the adequacy of the credit-risk assessment processes of financial institutions, assess the use of contractual references to credit ratings and encourage financial institutions to mitigate the impact of such references, with a view to reducing sole and mechanistic reliance on credit ratings".

It says the EU's aim is to encourage the use of smaller rating agencies in order to further diversify the ratings market.