By Yali N’Diaye

WASHINGTON (MNI) – The Federal Reserve in a report to Congress
Monday identified 46 regulatory references to credit ratings, mostly in
capital adequacy, and presented characteristics of effective
alternatives of creditworthiness.

Alternatives, the central bank said, must be sensitive to risk,
applicable in a consistent way and “reflect market developments rapidly,
adjust for new information and changes in market practice and
methodology, and not increase the risk of regulatory arbitrage as new
financial methods and structures are developed.”

The Fed’s Report to Congress on Credit Ratings was mandated by the
Dodd-Frank Act, which required agencies to identify their regulatory
references to ratings and report on potential reforms to eliminate such
reliance.

While the Fed does expect to propose amendments to remove rating
references in its capital requirements, it will rely, “to the extent
practicable,” on the alternatives developed by an inter-agency working
group.

That will involve seeking public comment and reviewing them, the
Fed said, stressing that to be “especially useful,” the standards must
take into account the market’s view and not only the regulators’
assessment.

Indeed, the Fed said, “Supervisors generally do not have the
resources independently to rate the creditworthiness of individual
assets on a regular basis across hundreds of regulated institutions.”

“Moreover, alternative standards of creditworthiness are also most
effective when they result in generally consistent treatment of assets
across regulated entities and when supervisors are able to apply the
standards consistently,” the Fed said.

In addition to capital requirements, rating references are included
in other Fed regulations such as Regulation H establishing supervisory
requirements for state member banks or regulations related to banks’
international operations.

Regulations governing transactions between member banks and their
affiliates also include references to rating agencies.

In August 2010, the Fed and other regulators, on an inter-agency
basis, proposed approaches for considering alternatives to ratings. The
Fed said it has received 25 comments that it will “take into
consideration.”

It will also take into account views expressed during a November
2010 roundtable, it said.

** Market News International Washington Bureau: 202-371-2121 **

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