MercoPress. South Atlantic News Agency

Sub-prime quake: EU will review credit rating industry

The European Commission is planning to review the credit rating industry after suggestions the sector was too slow to warn on the US sub-prime loans crisis, according to The Financial Times.

With the weakness in the sub-prime mortgage market sparking fears of a global credit squeeze, Brussels will probe the industry's voluntary code. This code aimed to stop any conflict of interest over the fact credit agencies can be paid by the firms they rule on. A Commission spokeswoman said it would look at whether legislation was needed. Some of the largest credit agencies include Standard & Poor's and Moody's. Moody's senior managing director Frederic Drevon said the firm was "committed to continuing the constructive dialogue it has had with the regulators and policy makers". US banks were the first to warn a year ago of a possible crisis in the housing and mortgages industry, but apparently the credit agencies didn't begin to review financial instruments linked to mortgages until last autumn, says the Financial Times. "If risk rating agencies believe it is business as usual, they are quite wrong", said EU officials quoted by the London newspaper. The sub primer mortgage crisis forced the bankruptcy of several US funds such a Bear Sterns and American Home Mortgage and Homebank. In Europe funds linked to high risk mortgages holdings and managed by banks in France, Switzerland, UK and Germany suffered heavy losses. Credit agencies work by determining the creditworthiness of a particular company or investment fund. Their ruling helps determine how much interest the firm or fund in question will have to pay on funds they borrow. The Commission's investigation will be led by the office of European Union Internal Market Commissioner Charlie McCreevy, who has responsibility for the financial services sector within the 27-nation block. The investigation is expected to continue until April next year at the earliest