Page last updated at 16:19 GMT, Thursday, 31 July 2008 17:19 UK

Tougher rules for rating agencies

Foreclosed home
Regulators have criticised ratings agencies on both sides of the Atlantic

Credit rating agencies could be banned or prosecuted under a draft European Union law aimed at making them more accountable for the advice they give.

Firms that rate debt investments, such as Fitch, Moody's and Standard & Poor's, have been criticised for their role in the sub-prime mortgage crisis.

The new law would replace a voluntary code of conduct.

It is open to public consultation until early September and needs approval from EU states and the European parliament.

"This crisis has show that self-regulation has not worked," said Charlie McCreevy, the EU's internal market commissioner.

He added that it was generally accepted that the agencies had "failed to reflect early enough in their ratings the worsening of market conditions thereby sharing a large responsibility for the current market turmoil".

Under fire

Ratings agencies have come under fire from investors and regulators on both sides of the Atlantic for their favourable assessments of debt that included sub-prime mortgages, which were provided to people with poor credit histories.

Higher interest rates squeezed these mortgage holders' abilities to meet their repayments, triggering heavy losses on the investments they were linked to.

Billions of dollars have been wiped off bank balance sheets as a result.

A report by the US financial regulator into the activities of ratings agencies found earlier this month that the firms had broken regulations.


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