Agencies Look at Credit|Ratings Substitutes

     WASHINGTON (CN) – Financial regulators are looking for alternative means to evaluate the credit worthiness of securities and money market instruments, which is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

     Before passage of the act, many financial regulations required issuers of securities and money market instruments to obtain credit ratings from recognized ratings agencies.
     After the financial meltdown of the last few years, the methods of ratings agencies came under increased scrutiny, along with the paid relationship they had with the issuers whose instruments they evaluate.
     In a joint advanced notice of proposed rulemaking the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision announced the guidelines they plan to use to evaluate alternative methods of credit analysis.
     According to the agencies, any new method of analysis must appropriately distinguish the credit risk associated with a particular exposure within an asset class; be sufficiently transparent, unbiased, replicable, and defined to allow banking organizations of varying size and complexity to apply them; and be able to provide for the timely and accurate measurement of negative and positive changes in creditworthiness.
     The agencies asked for comments on their proposed requirements for an alternative system, specifically if the principles provided capture the appropriate elements of sound creditworthiness standards and what changes would strengthen the principles and thus any new method for assessing credit worthiness.

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