Published: Aug 10, 2010 5:32 PM EDT
Updated: Aug 11, 2010 4:31 AM EDT

WASHINGTON (AP) — Federal regulators have taken a first step toward eliminating the use of credit ratings in rules for banks, under a mandate of the new financial overhaul law. The head of the Federal Deposit Insurance Corp. said Tuesday it won't be easy to come up with a replacement.

The FDIC board voted to take public comment for 60 days on alternatives to relying on credit rating agencies to assess the risk of investments. The Federal Reserve and the Treasury's Office of the Comptroller of the Currency published the document requesting comment with the FDIC.

The landmark law enacted last month calls for reducing the influence of the three big rating agencies — Moody's Investors Service, Standard & Poor's and Fitch Ratings.

The rating agencies were discredited in the financial crisis for giving high ratings to risky mortgage securities.

The bank regulatory agencies are expected to follow with proposed new rules and eventually to adopt the changes. The process could take months.

As big a problem as reliance on credit ratings became in the financial crisis, "finding an alternative is going to be very, very difficult," FDIC Chairman Sheila Bair said before the 5-0 vote at Tuesday's board meeting.

Jaret Seiberg, an analyst with Concept Capital in Washington, said the changes pose a problem for the banking industry.

"The simple fact is that any replacement system will be more expensive and more cumbersome," Seiberg wrote in a research note. "This is why we expect regulators will drag out this process. We believe regulators appreciate the high risk for unintended consequences and will want to solicit multiple rounds of public comment before adopting a final course of action."

Also Tuesday, the FDIC board approved establishment of an Office of Complex Financial Institutions, and a Division of Depositor and Consumer Protection within the agency to help with its new duties under the financial overhaul law.

The rating agencies have long served as financial gatekeepers, assessing the creditworthiness of public companies and securities. Their grades can affect a company's ability to raise or borrow money and how much investors will pay for securities.

The agencies assigned AAA ratings to securities tied to risky subprime mortgages that later went bad and helped cause the housing bust. Afterward, the agencies had to downgrade many of the bonds as home-loan delinquencies soared and the value of those investments sank.

After the crisis, lawmakers and regulators targeted the credit raters. The Securities and Exchange Commission proposed rules designed to stem conflicts of interest and reduce investors' reliance on the three major agencies, which together account for around 95 percent of the ratings market.

The new overhaul law makes it easier to sue the agencies successfully. It deems the ratings to be expert advice in public offering documents, not just an expression of opinion protected by the First Amendment.

Also under the new law, the agencies must explain more fully how they assign ratings. If an agency performs poorly over time, the SEC could cancel its registration.