–Adds More Details, Comments

SEOUL (MNI) – The Financial Stability Board will present to the G20
a set of proposals of how to deal with systematically important
financial institutions (SIFI) and calls on authorities to reduce their
reliance on credit rating agencies, FSB Head Mario Draghi said
Wednesday.

“The FSB endorsed principles to reduce authorities’ and financial
institutions’ reliance on credit rating agency (CRA) ratings,” Draghi
said.

“The goal of the principles is to reduce the cliff effects from CRA
rating that can amplify procyclicality and cause systemic disruption,”
Draghi explained.

The FSB calls on authorities to achieve this by “removing or
replacing reference to CRA ratings in laws and regulations, where
possible, with suitable alternative standards for credit-worthiness.

In addition, they should expect banks, market participants and
institutional investors to make their “own credit assessments, and not
rely solely or mechanistically on CRA ratings.”

The FSB said standard setters and regulators should now seek
specific steps to ensure these principles can be
translated into policy approaches “tailored to specific financial
sectors and market participants,” Draghi said.

Diminishing reliance on CRA ratings “will take time — time for
parties that currently use ratings to develop their own credit
assessments,” Draghi said.

Draghi, who is also a member of the European Central Bank’s
Governing Council, said procyclicality of CRAs is a key problem in five
types of financial market activity: “prudential supervision of banks,
policies of investment managers and institutions investors, central bank
operations, private sector margin requirements, and disclosure
requirements for issuers of securities.”

Turning to the SIFIs, Draghi said that today’s agreement set a
milestone as the first time the FSB had agreed on core principles.

The proposals consist of four key pillars, including the creation
of effective resolution regimes, supplementary prudential requirements,
increased supervision and much stronger infrastructure for derivatives,
he said.

While new requirements should apply to all banks considered too big
to fail, “there is a category of globally actives SIFIs. It is to this
sort of institution that our work is initially geared,” Draghi said.

Specific measures taken by national authorities to ensure these
goal may be almost identical in some areas, in other areas they might be
very different, reflecting different financial institutions and
regulators, Draghi said.

In any case, however, “the effectiveness and consistency of
national policy measures for global SIFIs will be subject to review by
an FSB Peer Review Council,” the FSB said in a statement.

Detailed proposals by the FSB can be found at:

http://www.financialstabilityboard.org/press/pr_101020.pdf

–Frankfurt bureau tel.: +49-69-720142. Email: jtreeck@marketnews.com

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