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DBRS Response to CEBS Consultation Paper on ECAI Recognition

Core Content

DBRS, a globally recognized credit rating agency based in Toronto with offices in New York, Chicago, London, and Frankfurt, has submitted a detailed response to the Committee of European Banking Supervisors (CEBS) consultation paper on the recognition of External Credit Assessment Institutions (ECAIs) under Basel II. The company emphasizes its commitment to maintaining high professional standards, transparency, and independence in its credit assessments.

Main Points

DBRS supports the proposed joint assessment process for ECAI recognition, which aims to enhance efficiency, consistency, and reduce administrative burdens across member states. It believes that this process should focus on technical criteria, including objectivity, independence, and performance history, rather than on proving local market acceptance, which may create unnecessary barriers for less well-known agencies.

Key Views on ECAI Recognition Criteria

• Joint Assessment Process: DBRS endorses the idea of mutual recognition between supervisory authorities and encourages a coordinated approach to assessment, similar to those used in Canada and the U.S.
• Market Acceptance: DBRS highlights concerns regarding the requirement that an ECAI must demonstrate that at least one institution in a jurisdiction intends to use its credit assessments. This, it argues, could create a competitive disadvantage for agencies with strong global reputations but limited local recognition.
• Performance History and Methodology: DBRS supports the inclusion of performance history and systematic rating methodologies in the assessment process. It has published a Corporate Default Study that provides historical data on its ratings, which it believes is a suitable basis for the mapping process.

Mapping Process

DBRS appreciates the inclusion of qualitative factors in the mapping process, which allows for differences in ECAI methodologies and time periods for cumulative default rates. It believes that the mapping of credit assessments to risk weights should also be addressed under the joint assessment process to promote efficiency and cost-effectiveness.

Loss vs. Default Probability

DBRS argues that analyzing expected losses in isolation is generally inappropriate. It focuses primarily on the probability of default and, at lower rating levels, considers the potential for greater losses in sub-debt instruments. The company believes that the most informative measures are the probability of default by rating grade and by time to default.

Key Information

• DBRS Overview: Founded in 1976, DBRS is a generalist rating agency with over 1,000 rated entities worldwide. It has 150 employees and is expanding its operations in the U.S. and Europe.
• Regulatory Recognition: DBRS has been recognized as an NRSRO by the SEC and is approved by the Ontario Securities Commission. It also has formal recognition by the NAIC, allowing its ratings to be used in converting to NAIC numbers.
• Market Acceptance: Over 8,000 U.S. insurance companies use DBRS ratings to assess capital requirements. DBRS has over 4,500 subscribers, including institutional investors, financial institutions, and government bodies.
• Credibility and Independence: DBRS maintains high professional standards and is independent of economic pressures or control by the companies it rates. It has no single issuer accounting for more than 1% of its total revenues.
• Public Dissemination: DBRS makes its ratings publicly available at no cost on its website and through Bloomberg and Reuters. It charges for full reports and studies to sustain its operations while ensuring transparency and avoiding selective disclosure.

Conclusion

DBRS believes that the proposed recognition criteria and processes are largely appropriate and inclusive, but it strongly urges the CEBS to reconsider the requirement that an ECAI must demonstrate local market acceptance. This requirement, it argues, is anti-competitive and may hinder the recognition of reputable agencies that are less known in Europe. DBRS is committed to participating in the ECAI recognition process and is willing to provide further details and discuss its comments with CEBS members.