Basel to adopt flexible approach to point-in-time and business cycle ratings

The Basel Committee on Banking Supervision, the architect of the Basel II capital Accord, will adopt a flexible approach to point-in-time and business cycle credit ratings used by banks when reviewing advanced internal-rating based approaches.

Jeffrey Brown, a director in the risk analytics division of the Office of the Comptroller of the Currency, said the US regulator is currently reviewing the rating-based systems at US banks, but was placing more emphasis on ensuring credit rating systems have been developed in a controlled manner. “We are checking model validation policy, how the ratings are checked and ensuring that the ratings come from a process that is independent,” Brown told delegates attending Risk’s Credit Risk Summit 2002 USA in New York this week.

But, he added: “There are many fundamental questions that we are still thinking about." This includes some of the pros and cons of banks using longer-term ratings that cover full business cycles versus ratings calculated on a point-in-time basis. “These are questions that are, as yet, still unanswered.”

Darryll Hendricks, senior vice-president at the Federal Reserve Bank of New York, said national regulators were likely to adopt a flexible approach to the use of both point-in-time and business cycle ratings with regard to advanced credit risk methodologies used in Basel II. But, speaking in a personal capacity, Hendricks added: “It is important for the industry itself that it understands and adjusts its own behaviour in advance. We have multiple options in the framework. I would like to narrow the range as much as we can.”.

But Adam Gilbert, chief operating officer of JP Morgan Chase’s credit product group, said regulator concerns about point-in-time ratings were overstated. “Our own models send us very powerful signals about what is happening to our risk processes. You don’t need a regulator to tell you your credit risk has changed,” Gilbert said.