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. Some have already begun making public statements.
"We're not saying this is idiotic. They should be praised for what they are trying to do," said Charles W. Calomiris, a professor at Columbia University and a member of the Shadow Committee. "But this method has some unintended consequences."
One of those consequences was highlighted in a paper written by New York Fed researchers in 1994, which concluded that the variations in rating methods across different agencies makes them unreliable for regulatory purposes.
Mr. Ruding, of Citibank, worries about the concentration of power within an "oligopoly" of ratings institutions. In a recent speech, he argued for a hybrid system, combining a limited role for ratings agencies and more reliance on the sophisticated risk-assessment programs being developed by some large banks.
Mr. Gillespie, of KeyCorp, also expressed the hope that the committee's final decision would rely less on credit-rating firms and more on the banking industry's own improving risk-management abilities. He also issued an urgent call for input from the rest of the banking community.
"We need to help ourselves and make our voices heard," he said. "We have an opportunity in these next six months to influence the regulatory environment within which we will be working for many years to come."