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Echo Partners Community Bank Blog

    Bank Regulators and Unintended Consequences

    [fa icon="clock-o"]} [fa icon="user"] Howard Lothrop [fa icon="folder-open'] bank regulators

    RearView MirrorIn the never-ending struggle to refight the last war, our political leaders have once more embarked upon a quest to overly complicate bank management.  Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the agencies to review regulations that require the use of an assessment of creditworthiness of any security or money market instrument and make reference to, or have requirements regarding, credit ratings. 

    The agencies must then modify these regulations to remove any reference to, or requirements of reliance upon, credit ratings in such regulations and substitute in their place other standards of creditworthiness that the agencies determined to be appropriate.

    Yep, that's right.  All bank regulation must be stripped of any use of, or requirement concerning, credit ratings.  Instead, bank regulators must determine other appropriate standards of creditworthiness to be used.  The regulatory process of this transition began in earnest yesterday with the release of the Advance Notice of Proposed Rulemaking and a request for comments associated with this subject. Read the details.

    I don't know if you've ever considered this before, but credit ratings are used in a myriad set of requirements under federal banking regulation.  Banking regulators rely upon credit ratings in their general risk based capital rules, their market risk rules, and the advanced approaches rules.  Collectively these form what we typically refer to as the risk based capital standards.

    Not only are the bank regulators charged with inventing a new method for measuring and evaluating credit worthiness for this important task, they are also charged with considering the burden that the implementation of alternative methods of measuring credit worthiness might have on banking organizations of varying size and complexity.  I'm sure that prospect will help community bankers sleep easy at night.

    Should you wish to submit comments, you have 60 days to do so.  I think my only comment might be that instead of reinventing the credit rating wheel, perhaps assessing some liability to obvious cases of negligence at the rating agencies could well deliver a bigger bang for the buck.  What do you think?

     

     

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    Howard Lothrop

    Written by Howard Lothrop

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