The alternative, for sophisticated banks, is to use their own internal ratings.

ECONOMIST: Banking regulation

Banks that can impress international regulators with the sophistication of their risk management will be able to use their own internal ratings instead.

ECONOMIST: Well-cushioned in Basle?

There are also two methods based on banks' own internal ratings.

ECONOMIST: Bothersome Basel

Although external ratings will probably appear in some form, many banks would prefer a third option: to use their internal ratings as a way of setting capital.

ECONOMIST: Basle bust-up

Significantly, it proposes that internal ratings, which were originally to be used only by a few internationally active banks, should be applied to a wider range of financial institutions.

ECONOMIST: It is time for a more radical approach to banking regulation

Although there is more detail in the commission's discussion of internal ratings than there was in the Basle proposals, this is not saying much: the idea still has little content.

ECONOMIST: It is time for a more radical approach to banking regulation

Now this freedom given to banks to decide their own risk ratings, or what is known as the Internal Ratings Based Approach to determining capital, yields the following consequence for our biggest banks: they all hold relatively modest amounts of capital against their large books of mortgages.

BBC: Are banks taking dangerous mortgage risks?

That is why regulators now favour a third idea: the use of banks' own internal credit ratings.

ECONOMIST: It is time for a more radical approach to banking regulation

In essence, the SEC is proposing that the agencies tighten internal controls, establish professional standards for credit analysts and publicly disclose how they came up with ratings.

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