Government-Sponsored Enterprises

This report compares risk ratings done by bank regulators and nationally recognized statistical organizations like Standard & Poor's and Moody's Investors Service. While ratings by bank regulators and the organizations were fairly closely related to each other, they differed often enough that one could not be substituted for the other with a great degree of confidence. GAO did not find, however, any major differences between regulatory and organizational ratings for the least risky (triple-A-rated) banks. In addition, the evidence did not show that either regulators or the organizations were faster at reporting increased risk at the least risky end of the rating scale, in which a safe-harbor provision would apply. Because ratings by bank regulators and the organizations often differed, having both ratings would offer the government better information than if it relied on only one. If the evidence available from banks holds true for government-sponsored enterprises, then GAO's analysis suggests that only enterprises receiving the highest possible organizational ratings--triple-A, as proposed by the Department of the Treasury--should be eligible for exemption from regulatory requirements.

GAO found that: (1) although NRSRO ratings and banks' process of assessing capital, assets, management, earnings, and liquidity (CAMEL) to determine rate risks were similar, they differed often enough that one could not be readily substituted for the other; (2) no major differences existed between regulatory and NRSRO ratings for the least risky institutions; (3) neither bank regulators nor NRSRO consistently reported risk changes, and often did not have a common view of bank activity risks; (4) if low rating results from banks are assumed to be consistent with expected experience for enterprises, then a safe-harbor proposal limited to enterprises receiving two triple-A ratings would be unlikely to result in rate misclassifications, but if the safe-harbor proposal incorporates rating categories below this highest level, then the possibility of misclassification would be greater; and (5) since NRSRO and CAMEL ratings often differed, having both ratings would offer better information to the government than relying on only one.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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