FDIC Unsure How to Comply With Rating Agency Provisions

January 4, 2011 by · Leave a Comment
Filed under: FDIC, The Rating Agencies 

The Federal Deposit Insurance Corporation (FDIC) is seeking public comment on proposed rule changes for minimizing their use of credit ratings in bank capital rules as required by the Dodd-Frank Act.

Warren Buffett, Chairman of Berkshire Hathaway, whose firm is Moody’s biggest shareholder, was quoted by Colin Barr on Fortune.com as saying, “As problematic as ratings were in this crisis and the central role they played, finding an alternative is going to be very, very difficult.” FDIC Chairwoman Sheila Bair concurred by saying, “A year [the deadline imposed by the Dodd-Frank Act] is a short time frame.”

The FDIC has proposed, among other things, using credit spreads for calculating capital requirements. Critics warn that these provisions could be easily “gamed” and that the change could lead to problems worse than the current situation.

John Dugan, comptroller of the currency, said at a recent FDIC board meeting, “I do worry there is a little bit of throwing the baby out with the bathwater,” and he pushed for moderation. “While I hope we come up with credible alternatives, practical alternatives as a result of this process, I worry that we may not,” he said. “If we do not, one person’s view might be that Congress should take a second look at this if we [decide] that full swing was a little too far.” Dugan is right. Some ratings worked. Some didn’t. Let’s fix the broken multiple obligor model only.

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