WASHINGTON (7/27/11)—Any new credit rating standards that are developed must be able to quickly reflect market changes and “adjust for new information,” the Federal Reserve said in a credit rating report released on Tuesday. The report, required by the Dodd-Frank Wall Street Reform Act, makes the case for ratings reforms, noting that “credit ratings have proven in a number of important situations to have several shortcomings, including issues related to possible conflicts of interest and weaknesses in modeling.” Any new standards must “not increase the risk of regulatory arbitrage as new financial methods and structures are developed” and also “have broad applicability and be sensitive to the risk posed by different exposures,” the report added. The Dodd-Frank Act requires federal financial regulators to replace references to or requirements in their regulations regarding credit ratings with new standards of creditworthiness as established by each agency. The National Credit Union Administration (NCUA) has proposed replacing the current requirement that a security be assigned a specific grade (such as AA, A, or BB) to be a permissible investment, with the requirement that the security satisfy a narrative standard on credit quality. The narrative must generally include an internal analysis of the issuer of a given security, with a statement showing that the credit union considers the security provider to be capable of meeting its financial commitments. The NCUA was the first federal agency to publicly release newly developed credit ratings standards. The Credit Union National Association (CUNA) has said that these ratings changes, which have not been finalized, may create issues for credit unions. Credit ratings "can be useful to credit unions as part of a comprehensive approach to assessing credit risk," CUNA said, adding that the NCUA should consider permitting credit unions to rely on credit ratings "as long as the credit union also conducts further reasonable and appropriate due diligence." Credit rating agencies are the topic of a House Financial Services Committee Subcommittee on Oversight and Investigations hearing scheduled for 10:00 a.m.(ET) today. For the Fed report, a CUNA letter to the NCUA on credit ratings, and more on today’s House hearing, use the resource links.