01 February 2016

Eurosystem publishes more detailed criteria for accepting rating agencies

To ensure that the information provided by all four sources is consistent, accurate and comparable, the Eurosystem has established acceptance criteria for each credit assessment source as well as a harmonised rating scale, against which it regularly monitors the performance of all accepted systems. These procedures aim to protect the Eurosystem against financial risks as well as to ensure a level playing field among the credit rating providers.

In December 2015 the Governing Council decided to publish further details on the criteria for accepting a rating agency into the Eurosystem credit assessment framework (ECAF). The published criteria refer to the acceptance of rating agencies as external credit assessment institutions. An agency must, at the time of its application, be providing minimum coverage of assets eligible for use in monetary policy operations in terms of rated assets, rated issuers and the volume of assets rated. The rating agency’s coverage must be diversified across the eligible asset classes and across euro area countries.

The requirements are designed to ensure that rating agencies have broad credit risk expertise and a track record over time. For efficiency reasons and in order to ensure that only rating agencies with established and broad credit risk expertise are accepted, the requirements take into account market acceptance of rating agencies’ ratings, the credit risk interlinkages among the eligible asset classes, and the geographical concentration of eligible collateral in the euro area. At the same time, the thresholds are not so restrictive as to preclude the acceptance of new rating agencies: a rating agency assessing around 100 issuers, for example, may comply with the requirements, depending on the geographical and assetclass focus of its business. Furthermore, the set of coverage criteria as a whole is designed to ensure that the Eurosystem has information to ascertain whether a rating agency has an adequate performance track record and to map its ratings to the harmonised rating scale. In addition, the 80% historical coverage requirement over the three years preceding an application allows new rating agencies to benefit from a gradual increase in their European coverage in order to apply to be accepted into the ECAF once they can demonstrate well-established broad credit risk expertise and proven market acceptance.

In the acceptance procedure, the Eurosystem investigates all additional information relevant for risk protection and the efficient implementation of the ECAF. Compliance with the minimum coverage criteria serves only as a prerequisite for the initiation of an acceptance procedure. In view of the importance of the credit quality information for asset eligibility and valuation haircuts, the Eurosystem forms its decision on whether to accept a rating agency on the basis of a comprehensive due diligence assessment. Rating agencies must meet a number of information, regulatory and operational requirements. To be part of the framework they must, for example, be supervised by the European Securities and Markets Authority (ESMA). Furthermore, information on their credit ratings needed to monitor rating quality must be available to the Eurosystem. For efficiency purposes and in view of the resourceintensive due diligence process for each individual rating agency, the Eurosystem requires the minimum coverage criteria to be met before it considers accepting a new rating agency.

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