The Supervisory Conflicts of the European Securities and Markets Authority: European Union Attempts to Regulate Credit Rating Agencies

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GR:EEN Working Paper Series
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The European Union (EU) is determined to correct some of the governmental deficits in the ratings space. Centralised oversight of credit rating agencies (CRAs) at the European level is a principal feature of its regulatory response. The new European Securities and Markets Authority (ESMA) is charged with monitoring CRAs. However, the current framework leaves it vulnerable to supervisory conflicts which can undermine ESMA’s objectives and its capacity to correct some of the more egregious elements of sovereign bond ratings. Analytical interference in the rating process is foreseeable in the assessment of new methodologies, models and assumptions. Informal judgment is necessary to gauge the severity of market disturbances and the suitability of proposed revisions. In the preservation of stability, the conflation of these categories can further compromise ESMA’s authority. Simultaneously, ESMA may be placed in the awkward position of pursuing the conflicting objectives of enhanced stability and increased competition. Severe conflicts of interest would only compound its mandate and make the EU more susceptible to destabilising attacks.

Credit Rating Agencies; European Union; Risk and Uncertainty; Sovereign Debt Crisis; Financial Governance; European Securities; Markets Authority