Dodd-Frank: The Gift That Keeps On Giving

by Henry Meier

NCUA used its last meeting of the year to finalize regulations mandated by the Dodd- Frank Act requiring federal regulators to eliminate any requirement “of reliance on credit rating agencies.”  In other words, no more regulations requiring that financial institutions only invest in securities that receive certain ratings by Moody, Fitch or any other Nationally Recognized Statistical Rating Organization (NRSRO).  Of course, Congress didn’t decide for itself what the alternative to rating organizations should be, but instead made regulators responsible for developing “such standards of credit worthiness as each agency determines is appropriate.”

NCUA is mandating that natural person federal credit unions have policies and procedures in place to determine whether a security is an investment-grade security. Corporate credit unions must ascertain whether a potential security investment is one that has “a minimal amount of credit risk.”  Credit unions would make these determinations based in part on, but not limited to, several criteria provided by NCUA and additional guidance that NCUA plans to release prior to the regulation’s effective date six months after its publication in the Federal Register.

What is an investment-grade security, you ask?  ”An investment-grade security is one where the credit union determines that the issuer has an adequate capacity to meet all financial commitments under the security for the projected life of the asset or exposure even under adverse economic conditions.”  Got that?  Clearly, this is a definition that both examiners and credit unions are going to need help implementing if only to make sure they are interpreting the rules the same way.

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