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On December 20, 2016, the Joint Committee of the ESAs published a final Report containing Good Supervisory Practices for reducing sole and mechanistic reliance on credit ratings. The purpose of the Report is to reduce the sole and mechanistic reliance on credit ratings, in accordance with requirements set out in legislation such as the Credit Rating Agencies Regulation, and to ensure a level of cross-sectoral consistency in the implementation of certain elements of the CRR. The ESAs have produced the report to assist regulators supervising entities such as banks, investment firms, insurance and reinsurance undertakings and investment companies. In particular, the Report seeks to clarify regulators' responsibilities for monitoring the adequacy of their supervised entities' credit risk assessment processes, assessing the use of contractual references to credit ratings and encouraging them to mitigate the impact of any such references. The Report provides an overview of how regulators may approach their supervisory responsibilities under the CRA legislative package.
The Report contains two sets of common good practices. In the first, the ESAs propose a general framework for the monitoring of the use of credit ratings and the treatment of references to credit ratings in credit assessments. They also suggest potential alternatives or complementary measures to ratings and also how to address issues of proportionality arising from the varying scale and complexity of supervised entities. In the second set, there are specific practices to establish a common approach for supervision of how credit ratings are used across specific business processes, in particular, where credit ratings are most in danger of being used in a mechanistic way.
The Report is available at: https://esas-joint-committee.europa.eu/Publications/Reports/ JC%202016%2071%20Final%20Report%20Good%20Supervisory%20Practices%20for %20Reducing%20Mechanistic%20Reliance%20on%20Credit%20Ratings.pdf.
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