Tags: Regulators | Credit | Rating | Alternatives

US Regulators Propose Credit-Rating Alternatives

Wednesday, 07 Dec 2011 01:01 PM

U.S. banking regulators on Wednesday released their first proposal for replacing the work of much-maligned credit rating agencies in the rules that govern bank capital requirements.

The 2010 Dodd-Frank financial oversight law bans any reliance on credit rating agencies, such as Moody's Corp. and McGraw-Hill Cos.' Standard & Poor's, in banking rules but regulators have struggled to come up with an alternative until now.

Until a replacement is found, it will be difficult for the United States to begin implementing new international capital requirements such as Basel III.

The Federal Deposit Insurance Corp. board on Wednesday voted to put out the alternatives for comment through Feb. 3.

Among the alternatives proposed are using the assessments produced by the Organization for Economic Cooperation and Development on the fiscal health of individual countries as a marker for assessing the risk of sovereign debt held by banks.

For certain assets, market indicators — such as stock price volatility — would be used to measure risk.

The amount of capital that would have to be held against securitizations would, in part, depend on the risk of the assets that make up the security.

The credit rating alternatives proposal released on Wednesday would only directly affect a rule to update capital requirements regarding risks posed by banks' trading books. This rule applies only to the largest U.S. banks such as JPMorgan Chase, Goldman Sachs and Citigroup.

The credit rating proposal is expected, however, to form the basis for a rule to be released soon on how to get rid of references to credit ratings in all bank capital rules.

That rule will affect banks of all sizes.

Regulators have pleaded with Congress to change the law so that at least some work done by credit rating agencies could be used in banking rules.

That plea has fallen on deaf congressional ears.

Acting Comptroller of the Currency John Walsh said reducing the reliance on credit rating agencies makes sense but warned that completely stripping their work from rules will be challenging because alternatives are hard to find.

"The approaches that are being proposed are intended to be simple and easily implemented, but they are relatively novel," he said.

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