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Basel
ii Compliance Professionals Association
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Basel Committee on Banking Supervision, The Joint Forum
Stocktaking on the use of credit ratings - June 2009
IV.
Conclusion
The stocktaking of the use of credit ratings in the legislation,
regulations, and/or supervisory policies (ie, LRSPs)
of the 26 agencies, representing 12
different jurisdictions, that delivered responses to JFRAC’s
questionnaire reveals a wide spectrum of use.
Member authorities’ responses displayed significant variations
both in the breadth and number of the LRSPs referring to credit
ratings as well as in the categories of LRSPs in which they were
used.
In general, in the jurisdictions covered by the survey, credit
ratings are used predominantly in LRSPs in the banking and
securities sectors, with more limited use in insurance sector
LRSPs.
Geographically, the North Amercian LRSPs
used references to credit ratings –specifically, to credit ratings
issued by NRSROs – significantly more than in the LRSPs of the EU,
Australia, and Japan.
In addition, US and Canadian LRSPs had more
in common with one another, while the LRSPs of the EU, Australia,
and Japan shared similarities to one another.
Notwithstanding the general differences in the way credit ratings
are used in the LRSPs of the member authorities that responded to
the questionnaire, the survey revealed notable similarities among
the respondents as well.
The category of determining regulatory capital clearly displayed
the broadest extent of the use of credit ratings in LRSPs, both in
numbers of LRSPs and in the number of jurisdictions in which they
are used.
The second most significant category of use was
identifying or classifying assets, usually
in the context of eligible investments or permissible asset
concentrations.
The remaining major categories of use were providing a credible
evaluation of the risks associated with assets purchased as part
of a securitisation offering; determining disclosure requirements;
and determining prospectus eligibility.
While no member authority had conducted a formal assessment of the
impact of the use of credit ratings in LRSPs on investor behavior,
almost all appear to have considered the issue.
Respondents were split as to whether their use of credit ratings
and/or reference to credit rating agencies has had the effect of
implying an endorsement of such ratings and/or agencies; however,
a slight majority answered in the affirmative.
Finally, as noted above, the US, Canada, the
EU, and Japan are considering proposals that may lead to various
changes in the use of credit ratings in the LRSPs of those
jurisdictions.
Appendix 1
Definitions of key terms
The terms “credit rating” and “credit rating
agency” are defined only by a minority of respondents, primarily
in regulations (with the US SEC defining both terms in
legislation).
Several respondents noted that the definitions were “implicit” in
their regulations or that familiarity with the terms is
understood.
The two most significant related terms for subsets of “credit
rating agencies” are the US SEC’s “nationally recognised
statistical rating organisation” (NRSRO) and Basel II’s “external
credit assessment institution” (ECAI).
“NRSRO” is defined in US legislation, and
that definition is cross-referenced extensively in US regulations
as well as the Ontario Securities Commission’s definition of
“rating organisation.”
While Basel II sets forth criteria to be used by national
supervisors for the “recognition” of ECAIs, it does not contain a
definition of the term.
Almost half of the respondents referenced
the term “ECAI” in their responses to this question, with several
referencing the Basel II framework and/or the Committee of
European Banking Supervisors (CEBS) “Guidelines on the recognition
of External Credit Assessment Institutions” (CEBS Guidelines) as
well.
A small minority indicated that their LRSPs include an explicit
definition of the term “ECAI.” For instance, under the Australian
prudential standards, an ECAI is defined as “an entity that
assigns credit ratings designed to measure the creditworthiness of
a counterparty or certain types of debt obligations of a
counterparty.”
The Markets in Financial Instruments
Directive (MiFID) includes the term "competent rating
agency" as one that "issues credit ratings in respect of money
market funds regularly and on a professional basis and is an
eligible ECAI within the meaning of Article 81(1) of Directive
2006/48/EC."
Article 81(1) is contained with the EU Capital Requirements
Directive (CRD) that implements the Basel II framework and,
consistent with that framework, does not define an ECAI, but
instead sets forth criteria for the recognition of eligible ECAIs.
Specifically, Article 81 states that “Competent authorities shall
recognise an ECAI as eligible … only if they are satisfied that
its assessment methodology complies with the requirements of
objectivity, independence, ongoing review and transparency, and
that the resulting credit assessments meet the requirements of
credibility and transparency.”
The term “investment grade” and its
variants (eg, “non-investment grade”) are also defined by almost
half of the respondents, with those definitions almost evenly
divided between those that define the term by reference to
specific ratings from specified entities (eg, at or above a Baa
rating from Moody’s) and those that define it by reference to
categories of ratings and/or entities (eg, rated in one of the
four highest categories by an NRSRO).
Other related terms included subsets of credit ratings such as
“approved ratings,” “applicable external
ratings,” and “credit rating grades” as well as subsets of credit
rating agencies such as “approved rating organisations” and
“designated rating organisations.”
One respondent defined the terms “solicited rating” and
“unsolicited rating.”
The US SEC’s definition of the term “NRSRO” is cross-referenced in
a number of US banking regulations as well as several Canadian
securities regulations.
As noted above, almost half of the
respondents referenced the term “ECAI” in their responses to
question I.A.2, with several referencing the Basel II framework
and/or the Committee of European Banking Supervisors (CEBS)
“Guidelines on the recognition of External Credit Assessment
Institutions” (CEBS Guidelines) as well.
While the majority of respondents clarified their implementation
of Basel II,in several cases the responses were unclear on this
point.
The majority of respondents indicated that their LRSPs reference
specific credit rating agencies.
All but one of those respondents mentioned Moody’s Investors
Service, Standard & Poor’s Ratings Services, and Fitch Ratings,
with the exception being a US OTS regulatory bulletin, which
referenced the former two entities only.
DBRS Limited and Japan Credit Rating Agencies were each cited by
several respondents, while Rating and Investment Information,
Inc., Mikuni & Co., Fedafin AG1, and AM Best were each cited by
one respondent.
In several cases, it was unclear as to whether a respondent was
indicating that individual credit rating agencies were mentioned
directly in an LRSP, (eg, ““approved rating organisation” means
each of DBRS Limited, Fitch Ratings Ltd., Moody’s Investors
Service, Standard & Poor’s and any of their successors.”) or that
the LRSP used a term generally, with a list of credit rating
agencies meeting the criteria for that term contained elsewhere (eg,
“Investment grade corporate debt security shall mean any security
that…is rated in one of the four highest ratings categories by at
least one Nationally Recognised Statistical Ratings
Organisation.”)
Several respondents indicated that the
individual credit agencies listed are formally reviewed on a
regular basis, in some cases on a fixed schedule (ie, annually or
every five years).
Several others noted that the Basel II
and/or CEBS designation procedures for ECAIs also applied to the
removal of the ECAI designation.
Finally, a number of respondents indicated that their LRSPs naming
individual credit rating agencies could be amended through their
jurisdiction’s standard legislative or regulatory process.
The majority of respondents cited the ECAI designation procedures
set forth in Basel II as the basis for their
selection of the specific entities, with several referencing the
CEBS Guidelines as well.
The US SEC cited its 2007 regulations establishing a voluntary
registration program for NRSROs.
Several other respondents referred to industry consultation or
widespread market use as the basis for their use of specific
agencies in LRSPs.
Go to
Stocktaking on the use of credit ratings - June 2009 Part 5
Basel Committee on Banking Supervision, The Joint Forum
Stocktaking on the use of credit ratings - June 2009 Part 1
Stocktaking on the use of credit ratings - June 2009 Part 2
Stocktaking on the use of credit ratings - June 2009 Part 3
Stocktaking on the use of credit ratings - June 2009 Part 4
Stocktaking on the use of credit ratings - June 2009 Part 5
Stocktaking on the use of credit ratings - June 2009 Part 6
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