S&P Introduces Risk-Adjusted Capital Ratio For Financial Institutions
April 21, 2009
FEI Summary
On April 21, 2009 Standard & Poor's introduced a new risk-adjusted capital (RAC) ratio for financial institutions. As described in a press release issued by S&P, "The RAC aims to provide a globally consistent and independent view of capital adequacy for each of the financial institutions we rate.... and we intend to use it as a starting point for our analysis of capital adequacy."
In developing its own RAC ratio methodology for assessing financial institutions, S&P conducted cases studies with information from 150 banks during the past 12 months. Based on that information, The information "suggest[s] that the global banking system would be on average relatively weakly capitalized to weather the crisis scenario embedded in our risk-adjusted capital framework," said S&P.
S&P "currently expect[s] marginal rating implications upon adoption of this approach," states S&P credit analyst Bernard de Longevialle in the press release. He explains, "The RAC ratio, which is the quantitative transcription of our qualitative analysis, is only a starting point for judging capital adequacy, and our assessment of capital adequacy is also only one of many factors we use in arriving at a credit rating."
Further information is available in an article published by S&P on April 21, entitled, "Credit FAQ: Standard & Poor's Risk-Adjusted Capital Framework For Financial Institutions." Note: the document in the preceding link is Copyrighted by Standard and Poor's, www.standardandpoors.com, used with permission. S&P plans to hold a teleconference on its new RAC methodology on Thursday, April 23 at 10 am EDT, contact S&P for further information.
In related news, read FEI's summary of the U.S. Securities and Exchange Commission's recent Roundtable on Oversight of Credit Rating Agencies. The summary, written by FEI's Director of Public Affairs, Serena Davila, is availalble to FEI members only.
Prepared April 21, 2009 by Edith Orenstein, director, Accounting Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.