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EU regulators consult on credit agency recognition for Basel II

LONDON, June 30 (Global Risk Regulator) – Europe’s banking supervisors have issued for consultation their ideas on the principles for recognising a credit rating agency as a competent provider of creditworthiness assessments under the European Union’s version of the Basel II international bank safety rules.

Banks using the simpler Basel II approaches to measuring the chances of borrowers defaulting on their loans will rely on the judgments of credit rating agencies, known in bank regulator jargon as ECAIs – External Credit Assessment Institutions. Banks using more sophisticated methods of measuring their credit risk will use their own internal assessments of creditworthiness.

But only the credit assessments of an eligible ECAI, and for some risks the assessments of export credit agencies, may be used by banks and investment firms to determine risk weights under the standardised and securitised ratings based approaches to calculating the minimum capital needed to absorb surprise losses from defaults.

The Committee of European Banking Supervisors (CEBS), which comprises top banking regulators from the 25 nations of the EU bloc, wants comments on its consultation paper on recognising credit rating agencies to be sent in by September 30.

The main task of CEBS is to advise the European Commission, the EU’s executive arm and the body that initiates financial regulation in the EU, on the implementation of the Capital Requirements Directive (CRD). The CRD is the law, now going through the European Parliament, that will apply the EU version of the complex, risk-focused Basel II capital rules to all EU banks and investment firms.