ALEXANDRIA, Va. (6/20/13, UPDATED: 3:54 p.m. ET)--Supervisory guidance on a National Credit Union Administration rule regarding the use of credit ratings by natural-person credit unions has been sent to federal examiners and credit unions by the agency.
The credit ratings rule, required by the Dodd-Frank Act, was approved December 2012 by the NCUA and goes into effect this month. Dodd-Frank required all federal financial agencies to review their regulations for any use of credit ratings to assess the creditworthiness of a security or money-market instrument, to remove those references, and replace them with appropriate substitute standards.
The Letter to Credit Unions (13-CU-05) is intended to help credit unions understand examiners' focus on specific elements of a sound due diligence process, including:
Key factors to consider in analysis of credit risk for various investment types and counterparty agreements;
Guidance on structured securities analysis; and
The NCUA defines an "investment-grade" security under the new rule as a security in which the credit union determines the issuer has adequate capacity to meet the financial commitments under the security for the projected life of the asset or exposure even under adverse economic conditions. A security with "a minimal amount of credit risk" is one in which the issuer has a very strong capacity to meet the financial commitments under the security, the agency added.
NCUA Chairman Debbie Matz said at the December meeting the agency's goal in developing the new standards "was to make sure credit unions have the evaluation standards necessary to maintain their safety and soundness in today's investment environment."
NCUA staff at that time said that credit-risk examination processes will not change, but pledged that examiners will not take a rigid, "bright-line" approach when looking over credit union investment portfolios. Examiners will look at a credit union's investment process, pre-investment research, and what is done after an investment is made, NCUA staff said.
The newly released guidance illustrates how a credit union should fulfill its responsibility to make an independent determination about the risks associated with its investment purchases, without the sole reliance on nationally recognized statistical rating organization credit ratings.