NCUA – Updated Standards of Investment Creditworthiness (Investment Grade)
One of the many results of the Dodd-Frank Act is that government agencies, including NCUA, remove references to Nationally Recognized Statistical Rating Organizations (NRSRO) that are contained within regulation. NCUA published the final rule pursuant to this order in December 2012, and the final rule became effective June 11, 2013.
While the final rule does not prevent credit unions from using NRSRO ratings as a component of investment pre-purchase due diligence or when referencing what investments are permissible per specific credit union board-approved policies, there are additional considerations that should be made. One key definition that has been added to regulation is the definition of investment grade. Per the new NCUA regulation:
Investment grade means the issuer of a security has an adequate capacity to meet the financial commitments under the security for the projected life of the asset or exposure, even under adverse economic conditions. An issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely repayment of principal and interest on the security is expected. A Federal credit union may consider any or all of the following factors, to the extent appropriate, with respect to the credit risk of a security: Credit spreads; securities-related research; internal or external credit risk assessments; default statistics; inclusion on an index; priorities and enhancements; price, yield, and/or volume; and asset class-specific factors. This list of factors is not meant to be exhaustive or mutually exclusive. (Part 703.2 Definitions)
While the above definition does not explicitly prevent a credit union from using NRSRO ratings to define permissible investments in policy, the additional factors are listed as guides to help credit unions gauge risk of default and imply that simply accepting an investment rating may not be enough for proper credit risk analysis.
Credit union management teams and boards of directors should review the amendments to NCUA regulation carefully to ensure both policy and current credit union practices comply with the updated regulations.
Find the final rule, as published in the Federal Register on December 13, 2012, here.
Find the full text of amended Part 703, accessible through the Electronic Code of Federal Regulations, here.
