Basel regulators make U-turn on banks' use of credit rating agencies

PUBLISHED : Sunday, 11 October, 2015, 11:44pm
UPDATED : Sunday, 11 October, 2015, 11:44pm

Global banking regulators have decided to allow lenders to keep using credit rating agencies to help them determine how much capital they need to hold to cover the risks of borrowers getting into trouble, a top central banker said.

Stefan Ingves, the head of the Swedish central bank and chairman of the Basel Committee on Banking Supervision, said few banks were happy with proposals made in March to revise a "standardised" approach for calculating credit risk.

Revised proposals would be published by the end of the year, Ingves said.

"This is likely to include reintroducing a role for external credit ratings into the credit risk capital framework," he told an Institute of International Finance meeting in Lima.

The Basel Committee of banking regulators from nearly 30 countries proposed in March revising how lenders assess what capital provisions they must make to guard against credit risks, which for many banks account for most of their risk-weighted assets.

In particular, regulators wanted to simplify the way capital buffers are calculated after seeing wide variations in the methods used, and proposed reducing a reliance on external credit ratings of borrowers issued by agencies like Moody's, Standard & Poor's and Fitch.

This followed policymakers' concerns following the 2007-09 financial crisis that banks had become too reliant on agencies, some of whose ratings on securities such as collateralised debt obligations were too lenient.

Since then, US financial industry reforms have gone as far as barring all references to external rating agencies, leaving regulators scratching their heads as to how exactly banks should assess their interbank risks.