The European Securities and Markets Authority (Esma) has initiated an investigation against three credit rating agencies including Standard & Poor’s (S&P), Fitch and Moody’s Investors Service to examine their practices for evaluation of banks.

Esma chairman Steven Maijoor told Financial Times that the pan-European watchdog will verify whether the process applied by rating agencies are due diligence and sufficiently rigorous and transparent and is expected to finish the same by the end of 2012.

Last year, the regulators had made it mandatory for credit rating agencies to register with Esma, after being severely criticised over rosy opinions of structured products and banks before the financial crisis and mass downgrades of sovereigns and financial institutions amid the eurozone crisis.

Maijoor further added, "Bank ratings are very important because there is an interaction with sovereign ratings and government bonds."

"This is an area where there have been many ratings changes in the past weeks and years. That raises issues of whether there is sufficient resource and expertise to cope with the additional work."

He said that Esma was not trying to influence the actual ratings and stressed, "This is not rating the ratings. We are not putting restrictions on the methodology. We only ask that their choices make economic sense and be logical."

Moody’s downgraded 15 global banks last month and S&P took a similar step late last year, downgrading 15 of the top 37 global banks in November after changing its methodology.