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Eligibility of External Credit Assessment Institutions

Author

Listed:
  • Helena Suvova
  • Eva Kozelkova
  • David Zeman
  • Jaroslava Bauerova

Abstract

The Basel Committee on Banking Supervision in 1999 issued a draft New Basel Capital Accord (Basel 2). Its principles are to be incorporated into the European legislation and into the Czech banking regulations. The Standardised Approach to calculating the capital requirement for credit risk is newly based on external credit assessments (ratings). Banking regulators and supervisors have to be prepared for the process of determining eligible credit assessment institutions (ECAIs) and will have to elaborate a formal recognition procedure. This paper investigates the approaches a supervisor may apply to ECAI recognition and elaborates on the criteria of recognition. First, the paper reviews the available rating agencies on the market (including their rating penetration on the Czech market), their best practices and the experience with the use of their ratings for regulatory purposes. Second, drawing on international experience and the proposed Basel 2 rules, we outline the fundamental supervisory approaches to recognition, including the legal aspects thereof, and analyse their pros and cons and the frontiers of supervisory decision making. Third, we outline the rules for recognition, including requirements or expectations (e.g. soft limits), documentation and typical interview questions with the potential candidates. We find the CNB's approach to be in compliance with CEBS Consultative Paper CP07 (issued for public consultation in June 2005).

Suggested Citation

  • Helena Suvova & Eva Kozelkova & David Zeman & Jaroslava Bauerova, 2005. "Eligibility of External Credit Assessment Institutions," Research and Policy Notes 2005/03, Czech National Bank, Research Department.
  • Handle: RePEc:cnb:rpnrpn:2005/03
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    File URL: http://www.cnb.cz/en/research/research_publications/irpn/download/rpn_3_2005.pdf
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    More about this item

    Keywords

    Basel capital accord; Basel II; Credit rating; default; eligibility criteria; eligibility evaluation; external credit assessment institution (ECAI); export credit agency (ECA); mapping rating grades; market acceptance of ECAIs; rating agency; recognition process;

    JEL classification:

    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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