US Consults On Alternative To Credit Ratings

by Glen Shapiro, LawAndTax-News.com, New York

16 August 2010

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision have published an advance notice of proposed rulemaking regarding alternatives to the use of credit ratings in their risk-based capital rules for banking institutions.

The advance notice from the agencies is issued in response to section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the agencies to review regulations that require an assessment of the credit-worthiness of a security or money market instrument and contain references to or requirements regarding credit ratings.

In addition, the agencies are required to remove such references and requirements and substitute in their place uniform standards of credit-worthiness, where feasible.

The advance notice solicits comment on alternative standards of creditworthiness that could be used in lieu of credit ratings. It requests comment on a set of criteria the agencies believe are important in evaluating creditworthiness standards, including risk sensitivity, transparency, consistency, and simplicity.

It asks for comment on a range of potential approaches, including basing capital requirements on supervisory risk weights or on market-based metrics, as well as on how these approaches might apply to different exposure categories. It also seeks comment on the feasibility of and burden associated with alternative methods of measuring creditworthiness for banking organizations of varying size and complexity.

The advance notice addresses only the references to credit ratings in the agencies’ capital rules. It is expected that proposals for removing references to credit ratings in other parts of their regulations will follow separately.

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