Credit Rating Changes Approved by NCUA

The National Credit Union Administration (NCUA) on Thursday unanimously approved a final rule that will replace the ordinal credit rating scale used by credit unions with a pair of new standards: "investment-grade" and "minimal amount of credit risk."

Credit rating changes were one of five items on the NCUA's agenda. The agenda for the final NCUA board meeting of 2012 also included discussions of community charter applications, the corporate stabilization fund budget, and fidelity bond coverage.

The Dodd-Frank Wall Street Reform Act requires 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 final rule complies with this request.

The NCUA said an "investment-grade" security, under the new rules, will be 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 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. Within the limits set by Congress, this final rule strikes the right balance," she said.

Matz added that credit unions must "understand that the need for thorough investment analysis and due diligence has not changed."

The credit rating changes will become effective 180 days after they are published in the Federal Register. This delayed effective date will give credit unions more time to adapt, and the agency more time to train examiners, NCUA staff said.

Matz said the ratings changes represent "a new road" for the agency and credit unions alike. "We will have to walk down this road together," she added.

NCUA staff during the meeting said that credit-risk examination processes will not change. However, staff added, 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.

Supervisory guidance on the credit rating changes will be released, and the NCUA will also hold a webinar and conduct other outreach activities before the rules become effective.

To view the CUNA NCUA Board Meeting Summary, click here.