PHILADELPHIA, March 31, 2000 - RMA strongly opposes tying bank regulatory capital requirements to data supplied by the ratings agencies, as proposed by the Basel Committee on Banking Supervision. RMA President and CEO Allen Sanborn expressed the association's objections in a March 30, 2000, letter to the Basel Committee that served as the association's response to its June 1999 consultative paper, A New Capital Adequacy Framework. (To view the Executive Summary of the response, click here).
Sanborn stressed that many banks currently use their robust internal credit ratings systems to allocate economic capital and urged that they be allowed to do so for regulatory capital purposes. To assist the Basel Committee in this process, RMA conducted research to provide an analysis of how institutions use their internal risk rating systems to assign capital. Banks that participated in the survey include: Bank of America, Citigroup, FleetBoston Financial, KeyCorp, Union Bank of California, Bank One, Bank of Montreal, Royal Bank of Canada, First Union, PNC Financial Services Group and Wells Fargo.
RMA has argued for some time that the 1988 Capital Accord does not adequately weigh the changing nature of credit risk in the marketplace today. For example, all commercial credits are assigned a flat capital charge of eight percent regardless of their credit quality. Clearly, an undersecured loan to a highly leveraged company should have a different capital charge than a well-secured loan to a strong middle market company. For this reason, RMA believes reforming the 1988 Accord is of critical importance.
However, the association strongly opposes tying capital requirements to external risk rating agencies, which comprise only a fraction of most banks' credit portfolios, even for some very large banks. "RMA believes very strongly that advanced-practice institutions must be allowed to use an internal ratings-based approach to assign regulatory capital," said Sanborn. "To do otherwise would retard the significant progress the industry has made over the last decade toward better identification, management, and mitigation of credit risk." He also pointed out that it would compromise greatly the Basel Committee's intent to revise the Accord so that regulatory capital requirements reflect underlying risks.
The Association is conducting additional survey work regarding economic capital allocations for retail credits and hopes to share the results with the Basel Committee later this year. RMA is also conducting further research to examine assets with durations greater than one year and economic capital allocation models with greater than one-year horizons.
Since the 1988 Accord was adopted, the banking industry has developed a number of advanced risk-management techniques that enable it to better measure and manage credit risk. Traditionally, banks maintained credit quality by lending only to the most creditworthy, the so-called "lend and hold" approach. Today, new portfolio management tools and analytics allow institutions of all sizes to use a number of grooming techniques to more effectively measure and price credit risk. Technology also has enhanced greatly the quality of information the industry uses to make credit decisions.
RMA has conducted groundbreaking research to enable institutions of all sizes to better understand the newly emerging nature of advanced risk management and mitigation practices. Winning the Credit Cycle Game (large banks) and Beating the Odds (community banks) both provide cutting-edge analysis of best practice procedures for managing credit risk in the commercial loan portfolio.
Recently, RMA released two additional studies designed to help financial institutions integrate risk management practices throughout the bank, and develop enterprise-wide risk measurement and control. The first sponsored in conjunction with the British Bankers Association and the International Swaps and Derivatives Association examines operational risk. The second piece of research explores how new portfolio management techniques are deployed to maximize profitability in the consumer-lending sector.
RMA is the only financial services trade association that specializes in promoting prudent and effective credit risk management practices across the entire banking and lending spectrum for institutions of all sizes. Its membership consists of more than 3,000 financial service providers. These institutions are represented in the association by more than 18,000 commercial loan and credit personnel in 50 states, Puerto Rico, Canada and numerous foreign cities, including Hong Kong and Singapore.
For more information or to obtain a copy of RMA's response to the Consultative Paper, call Pam Martin, Director of Regulatory Relations and Communications, at 215-446-4092 or via e-mail.