Is the Tide Turning?

December 28, 2009 by · Leave a Comment
Filed under: The Ratings System 

While not directly related to ratings, which is the main topic of this blog, the article below discusses a key related issue:  capital shortages at banks and their drag on lending.  A revamp of the ratings system could actually help address this problem because a carefully crafted restructuring of the way securities are rated and a corresponding restructuring of how regulators use these ratings would increase regulatory capital at institutions.  How?  Under the current system, securities that are rated below investment grade are treated as entirely toxic and drain capital from the banks that own them.  In many cases, only a small portion of these securities has been deemed uncollectible and therefore the entire security is not actually toxic.  Designed correctly, a new ratings system and cohesive regulatory framework would treat only the portion of assets at risk of loss as “toxic” and therefore would not punish a bank’s capital levels for the collectible portion.  The result would be a more accurate, reflective calculation of capital that would also increase capital at many banks as it relates to multi-obligor securities.

In the meantime, we can draw some solace from the fact that the White House is at least communicating that they are listening and are aware of the challenges imposed on banks that are keeping them from lending.  The flipside is that at least up to this point it appears the White House has very little practical influence on regulators, who have a different point of view.

Obama Pledges Support for Small Banks to Spur LendingBloomberg.com, December 23, 2009

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