As part of the financial overhaul, federal banking agencies have jumpstarted the process of finding alternatives to using credit ratings for calculating banks' capital levels. But alternatives are few and far between and some could be expensive too.
The various bank agencies - the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision - are seeking to gather information and comments on alternatives and on a set of criteria considered important to evaluate creditworthiness standards such as risk sensitivity, transparency, consistency and simplicity.
Alternatives could include basing capital requirements on more granular supervisory risk weight or on market-based metrics such as credit spreads. But a reliance on banks' own internal risk models or metrics developed by the regulators could be more expensive alternatives than the use of credit ratings, and banks may ultimately pass on the extra costs to customers.
Credit ratings agencies were blamed for their role in the financial crisis including wrongly giving AAA ratings to mortgage-related securities, many of which ended up defaulting.
Despite many wrongdoings at the credit agencies, banking regulators still want to take into account the fact that credit ratings have been useful in some instances and that removing them completely from the regulatory landscape will be difficult.
"The agencies have used ratings beyond capital," Sheila Bair, FDIC chairman, said. "In fact, examiners have used ratings for decade to determine whether or not to criticize corporate securities held in bank investment portfolios."
Federal banking agencies are soliciting comments for 60 days, and considering the difficulty of the task at hand, it's likely it will be a long process before they come up with any viable alternatives.