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FDIC Seeks Alternatives to Credit Ratings in Rules

Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp. (FDIC) speaks during an interview in Washington, D.C. Photographer: Joshua Roberts/Bloomberg
Sheila Bair, chairman of the U.S. Federal Deposit Insurance Corp. (FDIC) speaks during an interview in Washington, D.C. Photographer: Joshua Roberts/Bloomberg

Aug. 10 (Bloomberg) -- The Federal Deposit Insurance Corp., moving to implement the Wall Street rules overhaul enacted last month, will seek comment on alternatives to using credit ratings in banks’ capital guidelines.

The FDIC board voted today to allow 60 days of public input on ways to measure credit-worthiness, including risk weighting by category, as possible substitutes for credit ratings.

“Finding an alternative is going to be very, very difficult,” FDIC Chairman Sheila Bair said at a meeting in Washington. “I hope the comment process will enlighten us.” The agency is seeking comment jointly with the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Credit ratings by companies such as Standard & Poor’s and Moody’s Investors Service came under regulatory scrutiny after subprime mortgage securities with top grades helped fuel the worst financial crisis since the Great Depression. The rules overhaul President Barack Obama signed into law on July 21 requires regulators to establish “standards of credit-worthiness” to replace statutory references to credit ratings.

“I do worry there is a little bit of throwing the baby out with the bathwater,” said Comptroller of the Currency John Dugan, who oversees national banks and serves as a member of the FDIC board. “There are areas of credit ratings for single issuers that have worked well over the years and have been particularly useful for smaller institutions.”

If regulators can’t come up with viable alternatives to credit ratings, Congress should reconsider the directive, said Dugan, who is leaving the OCC and the FDIC board this month.

New Divisions

The FDIC board today also approved creation of two new divisions to help carry out the agency’s responsibilities under the regulatory overhaul. The Office of Complex Financial Institutions will oversee bank-holding companies with more than $100 billion in assets and non-bank firms deemed systemically important by the new Financial Stability Oversight Council.

The office will be responsible for liquidating failed bank-holding companies and non-bank firms.

The agency also established a Division of Depositor and Consumer Protection to help enforce rules that will be created by the new Bureau of Consumer Financial Protection. The FDIC will be responsible for policing banks with less than $10 billion in assets.

The FDIC board also approved a pilot program to offer low-cost transaction and savings accounts for low-income consumers who typically don’t have bank accounts. The program would bar participating banks from charging fees for insufficient funds and overdrafts.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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