Bank Regulators Want Less Reliance on Rating Agencies

October 22, 2010 by · 1 Comment
Filed under: The Rating Agencies, The Ratings System 

Bank regulators are currently drafting rules that would require banks to prove they had done adequate research before they could receive the regulatory capital benefits of holding highly rated bonds from securitizations. Regardless of how its holdings were rated, a regulated institution that depended exclusively on ratings for evaluating an investment’s safety would have to hold loss reserves against the full value of its position.

“If you can’t use a rating because you don’t want to get all the information, then presumably you won’t buy the instrument,” said a source close to the Federal Deposit Insurance Corporation, according to American Banker.

Certain legislators support the even more drastic approach of stripping “nationally recognized statistical rating organizations” such as Moody’s Corporation, Fitch Inc. and Standard & Poor’s of any official recognition in regulatory capital requirements. This is a positive sign. D.C. can’t say ratings are worthless and the process is corrupt, and then base capital ratings on NRSRO ratings. Let’s move away from the exclusive use of ratings.

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