To the Editor:
We, as the authors of the study described in your Nov. 18 story on internal risk ratings, would like to correct an important misimpression regarding the conclusions of the study.
Our study ("Credit Risk Ratings at Large U.S. Banks") was undertaken to enhance understanding of current practice and encourage further enhancement of bank capabilities in this important area of credit risk management.
In contrast to the impression left by the story and its headline ("Fed Study: Bank Risk Models Too Weak for Setting Capital"), the study dealt with capital standards only briefly, in a section near the end of the article dealing with potential use of ratings by regulators, analysts, and rating agencies.
Our conclusion on this point (as was correctly but belatedly cited in the middle of your story) was that use of ratings for regulatory capital purposes is indeed feasible, although enhancements to both bank and supervisory practices would be needed.
We were particularly concerned with the article's assertion that our work suggests that internal ratings "cannot be used to determine capital needs." While we appreciate your paper's attention to the study and the important subject of risk management, we urge careful interpretation of such work.
We would encourage readers with any lingering confusion or further curiosity to review the study itself (available at www.federalreserve.gov and in the current Federal Reserve Bulletin).
William F. Treacy
Mark S. Carey
Mr. Treacy is a supervisory financial analyst in the Fed's division of banking supervision and regulation. Mr. Carey is an economist with the division of research and statistics.