The Bank Policy Institute (BPI) has raised concerns over Moody’s Ratings' proposed changes to the bank rating methodology. In a letter submitted to Moody's, BPI expressed apprehension about the potential impact of these revisions on the banking sector. The proposed changes, announced by Moody's on April 30, 2025, suggest increased capital and liquidity requirements for banks.
Brett Waxman, Senior Vice President and Senior Associate General Counsel at BPI, criticized the proposal: “Moody’s plan would amount to a capital increase by stealth, effectively imposing higher requirements with insufficient empirical evidence or economic justification. This proposal punishes well-managed banks by shifting the goalposts despite no real changes to their riskiness. The result would be reduced credit availability, slower economic growth and higher borrowing costs.”
BPI argues that the new methodology should be objective and transparent. It highlighted several issues with the proposal:
- Higher Capital Requirements: Banks would need to hold more capital without any change in risk or regulation. Current levels are already near optimal according to academic studies, and most banks exceed regulatory requirements as noted by the Federal Reserve.
- Higher Liquidity Requirements: The approach excludes High-Quality Liquid Assets (HQLA) held at subsidiaries and relies heavily on Liquidity Coverage Ratio (LCR) metrics applicable only to some U.S. banks, potentially misrepresenting liquidity strength.
- Interest Rate Risk Management Standards: Excessive reliance on varying economic value of equity models could lead to unfair ratings cuts due to non-standardized data.
BPI warns that these changes could increase volatility in ratings and constrain bank operations, ultimately reducing lending capacity.
For further details or access to the letter, contact Austin Anton at austin.anton@bpi.com.
The Bank Policy Institute is a nonpartisan organization representing universal banks, regional banks, and major foreign banks operating in the United States. It conducts research on regulatory policies and represents the financial services industry in areas such as cybersecurity and fraud prevention.