ALEXANDRIA, Va. – NCUA last week proposed a new investment rule that will eliminate the need to obtain top credit ratings from Wall Street agencies and instead replace it with the judgment of a credit union’s management.
The rule was mandated by Congress after it was discovered that many Triple A-rated securities turned out to be junk and helped cause the failure of numerous financial institutions, including U.S. Central FCU, WesCorp FCU and several other corporate credit unions.
The proposed rule, mandated by the Dodd-Frank Financial Reform Act, will require that credit unions do an internal credit analysis of the counterparty in the transaction under an internal standard created by the credit union’s own board of directors. “The proposed rule replaces the standard credit rating – which came under attack during the financial crisis as many Triple A-rated securities failed – with a case-by-case analysis to decide whether a certain investment has the capacity to meet its financial commitments.”
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.
The proposal is issued with a 60-day comment period.
