Magazine article American Banker

Basel Ratings Not Very Popular, but No Alternative Yet

Magazine article American Banker

Basel Ratings Not Very Popular, but No Alternative Yet

Article excerpt

The plan by the Basel Committee on Banking Supervision to use private credit rating agencies to help set more risk-sensitive capital requirements for international banks is widely regarded as flawed -- but nobody seems to have a better idea.

The committee's plan, expressed in its June 3 proposal, "A New Capital Adequacy Framework," has come under increasingly frequent fire in the past two weeks. The assault began with a critique from the Shadow Financial Regulatory Committee, and it continued in speeches by H. Onno Ruding, vice chairman of Citibank N.A., and Robert W. Gillespie, chairman and chief executive of KeyCorp.

Not even the Basel Committee itself seems thrilled with the proposal. "We are not particularly satisfied with the use of external ratings," said Federal Reserve Bank of New York President William J. McDonough, who leads the committee.

However, unless critics offer a better alternative, they may be stuck with it, Mr. McDonough warned in a recent appearance before the Institute of International Bankers. "In the absence of your coming up with something we haven't thought of yet, I think we will probably come out with the external ratings," he said.

Even officials of the ratings agencies, which would seem likely to benefit most, are skeptical. "We have very mixed feelings about this," said an executive with one of the larger agencies, pointing out that a proliferation of ratings firms could lead to companies "shopping" for the best score.

Critics of the proposal have six months, until March 31, to respond. …

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