The Bank for International Settlements (BIS) may change the way banks assess the riskiness of their loans and how much capital needs to be allocatedáagainst them. At the FinanceAsia Asian Debt Conference yesterday, Deborah Schuler of Moody's confirmed that the BIS was yet to make a decision on this point but was considering using credit ratings such as its own as the basis for the new system.
Currently, a rigid system exists for allocating capital against a loan depending on the geographical location of the loan, and the type of entity the loan is made to. This has never been considered very satisfactory by banks. A system based on the credit ratings of Moody's, S&P and Fitch is mooted as an alternative. Hypothetically thisámight mean that a loan to a AAA corporate might require zero capital to be allocated against it, while a BB might require (again hypothetically)á 50% of the loan to be covered by capital.
However, Schuler said that Moody's for one was not keen on the idea. Schuler, the senior analyst in the Financial Institutions and Sovereign Risk group, said that there are several problems with the proposal. For one,átheábig agencies don't rate a lot of the small and medium-sized companies that banks lend to. And it may not be financially viable for the agencies to do so.
She also suggested there were issues with "shopping".áOnce the regulators mandate which rating agencies are acceptable in each country, the potential could exist for banks to go to the agency that will give them the highest rating on a given loan - at the lowest cost. "The potential is there for moral hazard," she said.
She added that banks were not keen on the BIS' proposal either, adding that they would prefer to use their own internal ratings systems instead.
Clearly any change to the BIS's rule would have a major impact on the way banks allocate their balance sheet. It is for this reason that the BIS is unlikely to act until it is absolutely convinced it can improve on the current system.
