Reform reading: Credit ratings hard to replace, overdraft fees criticized

Dropping credit ratings easier said than done

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Credit rating agencies have been raked over the coals by both Republicans and Democrats for overly optimistic ratings of asset-backed securities linked to the financial meltdown. As a result, the Dodd-Frank reform law set a July 2011 deadline for regulators to drop all references to credit ratings in how bank capital is assessed. But finding a suitable replacement isn’t easy.

Some possible options: having regulators gauge the risk of assets, requiring banks to perform in-house assessments subject to oversight, or allowing firms to use a third-party to measure asset risk, according to a story by the Wall Street Journal’s Jean Eaglesham and Deborah Solomon. Another option: Banking lobbyists may push hard to address the credit ratings ban in a housekeeping bill early in 2011 to fix various technical issues in the Dodd-Frank law.

The Fed and other banking regulators in August issued a notice saying they were gathering information about how to replace credit ratings, and received a dozen response letters posted here. The American Bankers Assn. told the Fed that a complete abandonment of credit ratings was “ill-advised and an over-reaction,” and would be especially costly for smaller banks that do not have advanced analytical resources.

Bank of America separately wrote to the Fed that it opposed eliminating all credit ratings from capital guidelines because other parts of the Dodd-Frank law require improvements in how the raters operate. For example, the law requires the Securities and Exchange Commission to create an Office of Credit Ratings to police their accuracy. The bank also played the global competitiveness card, saying that dropping credit rating references would “create a disparity” between U.S. and other countries’ capital approaches and the “lack of uniformity would reduce the competitiveness for U.S. institutions.”

Another item for bureau’s to-do list

Debit card users may not realize that big banks typically process largest payments first – which can quickly generate overdraft fees for customers with low balances in their accounts. The practice “causes substantial consumer injury, racking up multiple fees when a single large payment exhausts available funds,” says Jean Ann Fox, director of financial services at the Consumer Federation of America. She wants the Fed to step in and stop banks from manipulating payment order to drive up overdraft fees until the new Consumer Financial Protection Bureau is up and running in July.

Consumers pay $23.7 billion annually in fee-based overdraft programs, an amount greater than the “loans” extended in exchange for those fees, Fox says. That’s because the average debit card transaction causing an overdraft is around $17, while the customer fee paid for the overdraft averages $34. Not surprisingly, hardest-hit consumers are the elderly, military families, the unemployed, and young adults.

Bankers say overdraft programs are popular among customers as a way to manage their accounts and protect themselves from the embarrassment of having a debit card rejected or the extra expense of a returned check.

Bankers’ site to monitor reform law

The American Bankers Assn. has launched a website similar to Financial Reform Watch to monitor the roll-out of the Dodd-Frank reform law. But unlike our consumer-oriented site, the ABA’s website “is meant to be a dynamic tool for communicating to members and keeping them informed,” said Wayne Abernathy, an ABA executive vice president. Among the material featured is the banking group’s comment letters to various agencies on proposed regulations involving interchange fees, deposit insurance, and the Consumer Financial Protection Bureau.

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