The European Union's markets watchdog said on Thursday it would allow the continued use of U.S. credit ratings in the 27-nation bloc as regulators tighten scrutiny of a sector partly blamed for the financial crisis.
The decision is a relief for banks in Europe, large users of ratings from the United States, which feared big costs from having to find alternative ratings for calculating their regulatory capital buffers.
The European Securities and Markets Authority (ESMA) said it had ruled that the regulatory regime for credit rating agencies in the United States, as well as Singapore, Canada and Hong Kong, are in line with rules in the EU.
The ruling was necessary for the continued use of ratings from those countries in the EU after an April 30 cut-off date. Ratings from Japan and Australia had already been approved.
"By allowing EU-registered credit rating agencies to endorse credit ratings issued by credit rating agencies based in the USA, Canada, Hong Kong and Singapore, ESMA today takes a major step towards the international convergence of credit rating agencies' oversight," ESMA Chairman Steven Maijoor said in a statement.
Mark Bearman, a director at the Association for Financial Markets in Europe, a banking lobby, said the ruling will avoid the potential for multiple increases in capital requirements at banks, which are calculated using ratings.
"The inability of banks to use ratings from these third-country jurisdictions could also have led to increased concentration risks, unintended consequences for the management of liquidity and the non-viability of some business models, so this is good news for the industry and alleviates much of the impending market disruption," Bearman said.
AFME would also like the green light for ratings from Mexico, Brazil and Argentina, which still face an end of April cut-off.
ESMA said it was working, where possible, to finalize its assessments of regulatory regimes in the three countries.
"However, it is currently not possible to anticipate whether this can be finalized for all of the three countries... by that deadline," ESMA said.
World leaders agreed in 2009 to force rating agencies to obtain authorization and undergo direct supervision.
It was part of a crackdown on the sector which was criticized for giving high ratings to products based on sub-prime U.S. home loans that defaulted and helped to spark the global financial crisis.
(Reporting by Huw Jones; Editing by Will Waterman and David Cowell)
By Huw Jones