Global rating agencies should be held legally accountable

By Kim Jae-won

Staff reporter

The state-run think tank says that the government needs to tighten regulations for international credit rating agencies, which have been criticized for failing to warn of global finance crises.

"International credit rating agencies have a conflict of interest with their customers as they do other business with them," said Cho Sung-bin, an economist of the Korea Development Institute (KDI), during a two-day international conference in Seoul that ended Friday.

"For example, the agencies provide consulting services for firms, to which they give credit ratings. These businesses can harm the fairness of the ratings, so regulators need to ban such activities."

He also argued that the global credit ratings agencies, such as Moody's, S&P and Fitch, should take legal responsibilities for wrong gradings.

"The government needs to consider holding the agencies legally liable for their wrong ratings. They have enjoyed too much freedom from regulators."

The government also plans to bring transparency to the way these agencies do business. The step follows criticisms that the global rating agencies have not done their jobs properly, helping trigger two financial crises within three years.

The Financial Services Commission (FSC) said earlier this month that it will more strongly enforce a set of regulations introduced in January, leaving the doors open for more new changes.

In January, the FSC introduced rules for regular checks on whether the agencies collude to give rosy ratings for certain firms or grade "client" firms better.

A local representative from a global credit ratings agency admitted that it is true that there is conflict of interest when it grades firms from which they get paid.

"There is always a danger in giving generous ratings for firms because we get paid by them. We have strict standard, but I cannot say that it is perfect," a senior executive from a global ratings agency said on the condition of anonymity.

Regulators from advanced countries have already moved to limit the agencies' roles. The U.S. Senate passed the bill, which requires federal regulators to develop their own standards of credit-worthiness rather than rely only on assessments from rating agencies.

Shares of credit rating agencies dropped when the U.S. Senate approved the measures on May 13. In the European Union (EU), these agencies have recently been barred from consulting services, which can affect their ratings.