Regulators highlight the challenges of establishing internal credit ratings

Panelists at a World Bank conference in Washington, DC, yesterday outlined recommendations to banks in emerging markets considering implementing internal credit ratings systems.

Banks need to ensure they have the infrastructure, including data and systems as well as experts, such as quants, system designers and program directors, before creating an internal credit rating system, said Michael Ainley, head of the international firms department at the UK's Financial Services Authority.

Banks also need to establish a system of checks and balances to ensure ratings are accurate and establish accountability, added Barbara Grunkemeyer, deputy comptroller for credit risk at the Office of the Comptroller of the Currency. However, transparency is a challenge many banks face in implementing a credit ratings system, in both developed and emerging markets. Lee Hemphill, managing director in chief risk management and advisory at Goldman Sachs, said it is a challenge to provide transparency when using "knowledge-based" systems driven by expertise, which is difficult to communicate and disclose.

However, Grunkemeyer said banks can still provide transparency within knowledge-based sytems by providing more disclosure, documentation or by benchmarking internal ratings to public ratings, such as Moody’s or Standard & Poor’s. “We can start to open the window,” she said.