* FDIC must act as part of Dodd-Frank reform legislation
* Offer alternatives to credit ratings in capital reviews
* Seeking comment for 60 days
By Dave Clarke
WASHINGTON, Aug 9 (Reuters) - U.S. banking regulators took a first step on Tuesday on the road to replacing the use of private credit ratings to assess the soundness of banks, while also expressing nervousness about the transition.
Under the new Dodd-Frank financial regulatory overhaul law, bank regulators over the next year will have to propose alternatives to the use of private credit ratings in their assessments of banks’ capital levels.
Credit rating providers, such as Moody’s (MCO.N) and Standard & Poor’s MHP.N, have faced stiff criticism for their role in the 2007-2009 financial crisis. They have been been widely accused of giving overly high marks to securities that proved to be risky and eventually contributed to the instability of financial markets.
Federal Deposit Insurance Corp board members on Tuesday asked for public comment on possible alternatives to private credit ratings. They include relying more on credit spreads, banks’ own internal risk models and metrics developed by the regulators.
The regulators expressed strong support for limiting the use of the private ratings but also questioned the wisdom of completely jettisoning their use.
“I do worry there is a little of throwing the baby out with the bath water,” said Comptroller of the Currency John Dugan, who is leaving his post on Aug. 14 near the end of his five-year term.
In particular Dugan said smaller banks have successfully used private credit ratings for assessing risk.
While voicing support for the thrust of the new requirement, FDIC Chairman Sheila Bair also raised concerns about the difficulty of removing credit rating throughout the regulatory landscape.
“The agencies have used ratings beyond capital. In fact, examiners have used ratings for decades to determine whether or not to criticize corporate securities held in bank investment portfolios,” she said.
The FDIC regulators agreed to solicit feedback and information from industry and the public for 60 days on alternatives to private credit ratings.
It was unclear when a formal proposal would be made.
Also on Tuesday, the board agreed to create two new offices to help implement the new regulatory overhaul law.
One of the new offices, the Office of Complex Financial Institutions, was charged with managing the FDIC’s new authority to liquidate or unwind large troubled financial companies. The other, the Division of Depositor and Consumer Protection, would focus on enforcing consumer protection and safe-lending laws that primarily affect banks with less than $10 billion of assets. (Reporting by Dave Clarke; Editing by Steve Orlofsky)