Regulators Plan First Steps on Credit Rating
WASHINGTON -- U.S. financial regulators this week will take their first steps to replace private credit ratings in their review of bank capital levels, a big step for regulators eager to ensure they are able to accurately assess firms' financial condition.</br></br>The Federal Deposit Insurance Corp. on Tuesday will lay out a number of options to the use of credit ratings in capital evaluations, part of a joint effort with the Federal Reserve and other federal banking agencies. Among the options being discussed is a greater use of credit spreads, having supervisors develop their own risk metrics and a reliance on existing internal models, say people familiar with the matter.</br></br>Agency officials aren't expected to endorse a particular approach and instead plan to encourage input from banks, academics and other regulators. "It's very difficult to come up with a perfect substitute," a person familiar with the situation said, noting that regulators have been using credit ratings for decades."We have to be very explicit if we're going to take external ratings out, we're going to have to put something extremely specific in." This person added that some combination of measures could be used.</br></br>The move is required under the recently passed Dodd-Frank financial legislation, which gives regulators a year to review the use of private credit ratings and then calls for private credit ratings to be replaced.</br></br>The FDIC's move marks one of the first big rule-writing steps by regulators under the new legislation, part of a broader rethinking of capital levels required to be held by banks by regulators who want financial institutions to maintain the cushion necessary to weather market gyrations