NCUA Eliminates Wall Street Ratings As Benchmark For CU Investing

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ALEXANDRIA, Va. – Credit unions are urging NCUA to delay enactment of its new rule scrapping ratings by Wall Street agencies as a requirement for investments until the agency replaces the traditional ratings benchmark with definitive guidance.

“NCUA has noted that [it] will follow up with additional supervisory guidance,” Bonnie Humphrey-Anderson, chief financial officer for Oregon’s OSU FCU, said in a comment letter on the proposal. “It seems that this guidance should be available to credit unions at the same time as the final rule is implemented.”

NCUA proposal is required under provisions of last year’s Wall Street reform bill because lawmakers determined that poor or faulty ratings on many securities induced credit unions, banks and other investors to buy what turned out to be bad securities. In fact, many of the toxic mortgage-backed securities owned by the five failed corporate credit unions were Triple A-rated when they were bought.

The proposal would replace Wall Street agency ratings with either narrative standards or a credit union’s own internal standard. Under the proposal, credit unions would be required to explain how the securities it purchases or counterparties with which it does business meet the applicable standards. Credit unions would be required to develop, maintain and apply criteria for assessing the creditworthiness of securities and counterparties.

Under the NCUA proposal credit unions no longer would be required to obtain ratings form the Wall Street agencies, Standard & Poors, Moodys and Fitch, and instead would be required to use internal judgments as to the viability of their investments. NCUA is working with the Securities and Exchange Commission and other financial regulators to provide guidance for investing.

But credit unions are expressing worry at the absence of guidance before a final rule is approved.

“Without uniform supervisory guidance,” wrote Erin Mendez, chief operating officer for California’s SchoolsFirst FCU, “confusion and conflicts over judgment will lead to counterproductive and costly processes potentially increasing risk and more burdensome exams.”

“We believe that guidance must be issued prior to finalization of the proposal in order for credit unions to have an opportunity to voice any concerns that they might have in advance of being bound to comply with narrative indicators,” wrote Mendez.

“It is difficult to provide constructive comments on the Proposed Regulation when the additional supervisory guidance is not available for review,” wrote Jane Melchionda, president of EasCorp FCU, in Massachusetts.

Melchionda said she also is concerned with the subjectivity of the NCUA proposal, especially the requirement that credit unions determine an issuer’s “capacity to meet its financial obligations.” “There is the possibility that one credit union may classify the same investment differently than another,” she told NCUA.


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