The Dodd-Frank Act ban on references to credit ratings in financial-industry rules should be amended to keep it from blocking adoption of international capital and liquidity standards, a top banking regulator told lawmakers.
“Precluding undue or exclusive reliance on credit ratings, rather than imposing an absolute bar to their use, would strike a more appropriate balance,” John Walsh, the acting Comptroller of the Currency, said in testimony prepared for a Senate hearing today on the financial-regulation overhaul enacted last year.
Dodd-Frank requires regulators to replace references to credit ratings with an “appropriate” standard for measuring creditworthiness. Unless that provision is amended by Congress, the U.S. will have difficulty meeting the Basel III capital and liquidity framework adopted last year, Walsh said in comments prepared for the Senate Banking Committee.
Developing a new credit standard has been challenging for regulators, Federal Deposit Insurance Corp. Chairman Sheila Bair told lawmakers in her prepared remarks.
Credit-rating firms, including Moody’s Corp. and McGraw-Hill Cos.’ Standard & Poor’s unit, were targeted by lawmakers after they issued top rankings to mortgage-backed securities whose collapse helped spark the financial crisis.
Senators called Walsh and Bair to testify along with regulators including Federal Reserve Chairman Ben S. Bernanke at a hearing marking the half-year since passage of Dodd-Frank, the biggest financial rules overhaul since the 1930s. Agencies are drafting scores of measures to boost oversight of derivatives, executive pay and systemically important financial firms.
Senator Tim Johnson, the South Dakota Democrat who leads the Banking Committee, plans to make implementation of the law a primary focus of the panel, according to a draft agenda sent to members on Feb. 2.
“The Dodd-Frank Act is a major step forward for financial regulation,” Bernanke said in his prepared remarks. The Fed is working “to ensure that the law is implemented expeditiously and in a manner that best protects the stability of our financial system and economy.”
Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairman Mary Schapiro used their prepared testimony to repeat calls for funding increases to help carry out their new responsibilities.
The regulatory law represents “a major expansion of the SEC’s responsibilities and will require significant additional resources for full implementation,” Schapiro said. Budgets for regulators including the CFTC and SEC have been targeted by Republican lawmakers looking to rein in federal spending.
Republicans on the Senate Banking Committee, in a Feb. 15 letter to regulators, urged them to conduct “rigorous” cost-benefit analysis of rules required under the law.
“The potential harm to our already-weak economy and the public from ill-conceived rules cannot be underestimated,” the senators wrote to regulators, including Bernanke and Treasury Secretary Timothy F. Geithner.
Senator Richard Shelby of Alabama, the banking panel’s top Republican, said consumers will face higher costs for financial services because of regulatory and compliance fees stemming from Dodd-Frank.
“Absent legislative action, Dodd-Frank is going to be very expensive,” Shelby said.