Fed approves rule to remove credit ratings from capital rules

The Federal Reserve Board approved a joint final rule on Thursday that would remove credit ratings from capital requirements.

“Instead, the final rule includes alternative standards of creditworthiness for determining specific risk capital requirements for certain debt and securitization positions,” the Fed said. “These standards are consistent with the requirements of the [2010 Dodd-Frank Act], under which all federal agencies must remove from their regulations references to, and requirements of reliance on, credit ratings.”

The rule would ultimately include certain revisions made by the Basel Committee on Banking Supervision to its own market risk framework, though the provisions of the Basel framework that pertain to credit ratings were omitted from the rule.

Additionally, the final rule applies to all state-chartered Federal Reserve banks and bank holding firms. The rule is set to take effect on January 1, 2013.

The Fed also proposed a revision to a new method of risk-based capital weightings referred to as the simplified supervisory formula approach. This new method would base risk capital on subordination levels and cumulative losses on underlying collateral, though the revision focuses more on the delinquencies of underlying assets instead of cumulative losses, Reuters reports.

Brian Lancaster, the co-head of structured-product strategy and analytics at the Royal Bank of Scotland, said that banks will have a choice between the SSFA formula or a more complicated version of the formula, according to Reuters.

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