The FDIC met today to kick off not just the next round of U.S. action on long-delayed Basel rules, but also the replacement for credit-rating references required by the Dodd-Frank Act (see FSM Report RATINGS37).  Building on the pending U.S. proposal to implement the Basel II.5 market-risk rules (see FSM Report CAPITAL172), the FDIC board unanimously approved a new inter-agency proposal in this complex area.  While directly applying only to the largest banks subject to the market-risk rules, the agencies intend also to use the final methodology replacing ratings in the Basel III rules, thus considerably broadening their impact.  In this report, FedFin provides our initial analysis of the proposed approach, as well as of the FDIC board discussion.  Key to the new approach is wider — that is, generally more stringent — risk weightings and capital charges than now apply to comparable positions.  Notably, the approach departs from current treatment of most sovereign obligations as no-risk ones to mandate weightings of zero to 150 percent.  FedFin will shortly provide clients with an in-depth analysis of the new weightings requirements and their impact on both the trading and banking books.  Comments on this sweeping NPR will be due February 3, 2012.  The FDIC also acted on a proposal tracking the OCC’s far more simple approach to ratings replacements for investment securities (see FSM Report RATINGS46), along with a companion version of the OCC’s proposed due-diligence requirements.

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