Bank Regulators Flustered by Rule on Credit Ratings

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Byline: Kevin Wack

WASHINGTON - Bank regulators say they are frustrated with a little-noticed and initially uncontroversial provision of Dodd-Frank that forces them to eliminate references to credit ratings in most bank regulations.

The measure had strong bipartisan support in Congress last year, but the regulators say it is proving nearly impossible to implement. Under the law, regulators are required to substitute references to credit ratings with other standards of creditworthiness.

Regulators, however, said Wednesday that the few alternatives they have are not necessarily superior to the existing credit ratings.

"Developing such appropriate alternative standards of creditworthiness is proving an exceptionally challenging task," David Wilson, chief national bank examiner at the Office of the Comptroller of the Currency, told the House subcommittee on financial oversight.

Credit ratings are used in several places throughout banking regulations, including determining a bank's capital requirements. But lawmakers lost faith in the credit rating agencies as a result of the housing crisis, citing multiple instances where the agencies gave triple-A ratings to securities that were far riskier in nature.

In an effort to reduce the importance of the agencies, lawmakers added a provision to the regulatory reform law that would remove the agencies' judgments from the government's own assessments of creditworthiness.

Mark Van Der Weide, senior associate director of the Federal Reserve Board's division of banking supervision, said the Fed is considering several alternatives, including market-based indicators such as bond spreads. "Each of these approaches, like the use of credit ratings, has strengths and weaknesses," Van Der Weide said. …