Federal bank regulators say banks could consider emulating the National Association of Insurance Commissioners (NAIC) when they are trying to reduce reliance on credit ratings.
The agencies are talking about that approach in a notice advising banks about upcoming changes in bank risk-based capital rules.
The agencies — the Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision — plan to make the changes because of provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act that are designed to reduce official reliance on the bond ratings and other ratings provided by the major rating agencies.
Bank regulators and other federal agencies once incorporated the ratings provided by the “nationally recognized statistical rating organizations” (NRSROs) in laws and regulations. Because of a belief that ratings proved to be weak indicators of level of risk during the recent financial crisis, Congress put sections in the Dodd-Frank Act that encourage agencies use other means to gauge the riskiness of securities.
Comments on the bank regulators “advanced notice of proposed rulemaking” are due Oct. 25.
In one section, bank regulators talk about how banks might weigh the risk weights of individual exposures without using rating agency ratings.
The agencies could let banks hire independent data vendors to provide information about factors such as probabilities of default.
“Alternatively,” officials say, “the agencies could consider an approach for debt securities similar to that adopted by the National Association of Insurance Commissioners, under which a third-party financial assessor would inform the agencies’ understanding of risks and their ultimate determination of the risk-based capital requirement for individual securities.”
One problem with the approach the NAIC, Kansas City, Mo., has been using is the possibility that it could lead to excessive reliance on a single third-party assessment of risk, officials say.
“Regardless of the approach used, the agencies would establish strict quantitative and qualitative criteria to ensure that the methodology employed is consistent with safe and sound banking practices,” officials say.
CORRECTION: In an earlier version of this article, the attitude of the banking agencies’ attitude toward the NAIC’s approach was described incorrectly. The banking agencies are considering adopting the NAIC’s approach.