Bank Policy Institute
08/05/2024 | Press release | Archived content
BPI Responds to FCC Rulemaking on the Use of Weiss Safety Ratings
The Bank Policy Institute[1] submits these comments in response to the notice of proposed rulemaking issued by the Federal Communications Commission addressing its requirement that banks providing a letter of credit for Universal Service Fund High-Cost programs must have a "bank safety" rating from Weiss Ratings of B- or better.[2] We appreciate the Commission's attention to this issue and consideration of our prior letter dated February 2, 2024.
Weiss Ratings lacks the demonstrated expertise, transparency, integrity, and independence to determine if a banking organization can support participants in Commission programs. We described our serious concerns with Weiss Ratings' qualifications in our February letter, which is attached as an appendix. This letter responds to the Commission's request for comment on the advantages and legality of alternative methods of meeting its objective "to responsibly steward the funds [it] disburse[s]."[3]
I. The Commission should rely on the federal prudential regulators to assess the safety and soundness of a banking organization.
In paragraph 7 of the notice of proposed rulemaking, the Commission "seeks comment on any alternatives to using the Weiss bank safety rating" to, as described elsewhere in the proposal, "assess a bank's suitability for issuing a[] [letter of credit][.]"[4]
As we argued in our February letter, we believe it would be sufficient for the Commission's purposes to ensure a bank issuing a letter of credit is regulated by one of the federal banking agencies: the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. Banks operating in the United States are subject to comprehensive regulation addressing safety and soundness, including their capital, liquidity, and risk management. Unlike other industries, banks are supervised and regularly examined for compliance with laws and regulations. These examinations include testing a bank's capacity to withstand stress under difficult or changing circumstances. Federal supervisors also have access to financial information and enforcement mechanisms that a private organization cannot.
Other governmental entities, multinational companies, small businesses, and depositors look to the federal supervisory framework to ensure the safety and soundness of U.S. banks. As noted in our February letter, we have not identified any other instance in the Code of Federal Regulations where an agency relies on "bank safety ratings" from a private organization such as Weiss Ratings to determine the institution's suitability for providing services in connection with government programs. Looking to federal supervision also ensures that companies participating in Commission programs may consider the broadest set of banking organizations, including smaller institutions, for their needs. Therefore, we urge the Commission to remove the Weiss requirement, forgo any alternative "bank safety rating" requirement for all current[5] and future Commission programs, and accept letters of credit from any federally supervised bank permitted to conduct business in the United States.
II. The Commission should consider the Dodd-Frank Act's restrictions on adopting any rating requirement.
In paragraph 9, the Commission also requests comment on our "contention that using ratings from credit-rating organizations would be inconsistent with Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act."[6] We reiterate our concern with the Commission considering "ratings" that purport to "assess[] a bank's suitability for issuing a[] [letter of credit],"[7] regardless of which rating organization or organizations the Commission would select. Section 939A of Dodd-Frank requires all federal agencies to "remove any reference to or requirement of reliance on credit ratings."[8] A "bank safety rating" is functionally equivalent to a prohibited credit rating.
The Commission states that it seeks to adopt a rating for banks that would "ensur[e] that carriers have a [letter of credit] that can be relied upon" and provide "certain[ty] that the banks issuing [letters of credit] will be able to honor them."[9] The risk of counterparty failure is credit risk. Therefore, a rating that measures the likelihood of counterparty failure is a credit rating, regardless of whether its stated purpose is to evaluate "bank safety." Indeed, the Commission's current requirement is similar to a requirement the Nuclear Regulatory Commission removed earlier this year that had required a credit rating for certain companies providing guarantees, including letters of credit, that they had the financing necessary to fulfill their program obligations.[10] The Commission should not seek to adopt a new credit rating requirement in the midst of other federal agencies removing them to comply with Section 939A.[11]
To read the full comment letter, please click here, or click on the download button below.
[1] The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks, and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.
[2]Connect America Fund, Connect America Fund Phase II Auction, The Uniendo a Puerto Rico Fund and the Connect USVI Fund, Rural Digital Opportunity Fund, Rural Digital Opportunity Fund Auction, Establishing a 5G Fund for Rural America, Letters of Credit for Recipients of High-Cost Competitive Bidding Support, 89 Fed. Reg. 55,542 (July 5, 2024).
[3] 89 Fed. Reg. 55,543.
[4] 89 Fed. Reg. 55,544
[5] We have identified five such programs: (i) Connect American Fund Phase II (47 C.F.R. § 54.315); (ii) Rural Digital Opportunity Fund (47 C.F.R. § 54.804); (iii) 5G Fund (47 C.F.R. § 54.1016); (iv) Uniendo a Puerto Rico Fund (47 C.F.R. § 54.1508); and (v) Connect USVI Fund Stage 2 fixed support (47 C.F.R. § 54.1508).
[6]Supra note 4.
[7]Supra note 3.
[8] Pub. Law 111-203, Sec. 939A(a)(1)-(2).
[9] Supra note 4.
[10] NRC, Final Rule: Alternatives to the Use of Credit Ratings (Feb. 9, 2024), 2, available at https://www.nrc.gov/docs/ML2325/ML23251A115.pdf (the agency had "require[d] specified bond ratings from Moody's or Standard and Poor's to satisfy certain decommissioning financial assurance requirements for materials, power reactor, and nonpower reactor applicants and licensees"); 88 Fed. Reg. 25 (Jan. 3, 2023) (proposed rule).
[11]See, e.g., SEC, Removal of References to Credit Ratings From Regulation M, 88 Fed. Reg. 39,962 (June 20, 2023), available at https://www.federalregister.gov/documents/2023/06/20/2023-12591/removal-of- references-to-credit-ratings-from-regulation-m; Dept. of Labor, Amendments to Class Prohibited Transaction Exemptions To Remove Credit Ratings Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, 87 Fed. Reg. 12,985 (Mar. 8, 2022), available at https://www.federalregister.gov/documents/2022/03/08/2022-04866/amendments-to-class-prohibited- transaction-exemptions-to-remove-credit-ratings-pursuant-to-the.