This NPR proposes the approach regulators plan to replace credit-rating agency (CRA) determinations in their capital rules. It would apply only to the trading books held by the largest banks and BHCs, but the regulators expect also to use it in the U.S. version of the Basel III rules1 and in other cases where U.S. capital regulation is based on CRAs.2 The U.S. version of the Basel III liquidity rules3 could also apply this new ratings-replacement methodology, although the regulators have so far not discussed broader application beyond capital standards. Thus, these new credit-risk criteria will have far-reaching impact on the regulatory incentives that increasingly drive asset and liability decision-making by banks with the power to move broader markets. Although U.S. regulators intend the rating-free scoring system to be comparable to the Basel standards, significant differences may well lead to capital variations, especially with regard to securitization positions. Despite the detail proposed for rating replacements and the substantial research regulators believe supports their proposal, the NPR also outlines numerous alternatives that, if adopted, would dramatically alter the scope, cost and market-impact of the credit-risk criteria.


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