On Monday, November 29, at 2pm EST, the Federal Reserve Bank of New York will release an issue of its Economic Policy Review with an article addressing why supervisors assign ratings to banking organizations and how ratings advance the statutory and regulatory goals of supervision.
The article, titled “Why Do Supervisors Rate Banking Organizations?” looks at both historical records and current practices to highlight two primary reasons why ratings have been an important tool for supervisors, including 1) adding discipline to the supervisory and regulatory process and 2) ensuring that supervisors and regulators make judgments rigorously and consistently across different firms and over time.
Specifically, the article in this volume explores the following:
- The rationale for assigning ratings to banking organizations may seem straightforward, but the process involves considerably more complexity and nuance than many would recognize.
- Ratings provide discipline to the regulatory process and a means for clear communication of supervisory assessments to firms, regulators, and other stakeholders. If done well, ratings facilitate remediation among supervised firms while bolstering confidence in both the supervisory process and the banking system.
- The three channels by which the assignment of a supervisory rating, in the context of its associated consequences, can influence the behavior of a financial firm are: as a communication tool, as a direct risk mitigant, and as a broad incentive mechanism.
- Understanding these channels, and their implications, is important for both developing effective supervisory assessments and considering the optimal design of a rating framework.
For related media inquiries or questions on this article, please contact Mariah Measey at mariah.measey@ny.frb.org.
