WASHINGTON - Federal Reserve Bank of New York President William J. McDonough has joked that if the Basel Committee's proposal to link bank supervision to commercial credit ratings were adopted, investors would flock to the ratings agencies.
But far from being thrilled by the prospect, three of the four major ratings agencies oppose the plan.
Ratings agencies, such as Standard & Poor's and Moody's Investors Service, are independent firms that issue opinions about companies' creditworthiness. International regulators, through the Basel Committee for Banking Supervision, want to use credit ratings to help determine how much capital banks should hold.
London-based Fitch/IBCA was blunt. "The Committee is proposing to use ratings at variance with the way ratings agencies design them to be used, and this could result in the wrong incentives being given to the market," Fitch/ICBA said in a report.
The big New York-based agencies agreed, albeit more tactfully. The plan might compromise the agencies' independence and, by extension, their credibility, according to an S&P report.
Moody's urged the Basel Committee to use external ratings only as a stopgap measure. "If adopted, the external ratings approach should be seen as an interim measure, put in place while the banking and regulatory communities develop and fine-tune the internal ratings-based approach."
The only ringing endorsement of the committee's proposal came from Duff & Phelps Credit Rating Co. of Chicago. "The use of outside credit assessment institutions will promote consistency in risk weighting from bank to bank," the Duff & Phelps report said.
Duff & Phelps opposed letting banks set capital levels based on their internal risk ratings systems, arguing borrowers would migrate to banks with the most lenient standards. The result, Duff & Phelps concluded, could be "solvency concerns for individual institutions and potentially increased systemic risk."
Ratings agencies are not the only ones against the plan.
The Institute for International Bankers told the Basel Committee that only a small fraction of borrowers actually issue rated debt. The problem is particularly acute in Europe, where a survey found less than 25% of corporate borrowers had been rated.
Regulators have admitted some of the pitfalls in using ratings agencies, but insist it would improve on the current system. Eventually, banks' internal risk models could be used to set capital requirements, but not until the quality of those systems is improved, according to regulators.