Risk-Based Bank Capital Guidelines: Federal Banking Agencies Seek Comment on Alternatives to Credit Ratings in Risk-Based Capital Guidelines

Sullivan & Cromwell LLP - August 31, 2010

On August 10, 2010, 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 published a joint Advance Notice of Proposed Rulemaking seeking comment on the feasibility of certain proposed alternatives, as well as any other methodologies that commenters may wish to present, to the use of credit agency ratings in the respective agencies’ risk-based capital guidelines as mandated by Section 939A of the Dodd-Frank legislation. While recognizing that the agencies are considering a wide range of approaches to these issues, the advanced notice broadly discusses two possible alternatives: (i) assigning risk-weightings to an exposure based on its type and (ii) developing methodologies that would allow banking organizations to assign individual weightings more specific to each of their exposures based on market-based measures such as credit spreads, obligor-specific factors like debt-to-equity ratios, and other criteria. The advance notice then suggests how these approaches might influence rule-making across various exposure types.