The National Credit Union Administration (NCUA) has proposed a new investment rule that eliminates the need to obtain top grades from the rating agencies, replacing it instead with the judgment of a credit union's management.
The rule was mandated by Congress after it was discovered that many Triple A-rated mortgage securities turned out to be junk and eventually caused failures at numerous financial institutions, including "wholesale" federal credit unions such as Central Federal Credit Union and WesCorp Federal Credit Union.
The proposed rule, mandated under the Dodd-Frank Act, requires that credit unions conduct an internal credit analysis of the counterparty in each transaction using in-house standards created by a credit union's board of directors.
The proposed rule replaces standard credit ratings, which came under attack during the financial crisis when many Triple A-rated securities failed. The new standard would create a case-by-case review, with a decision made regarding whether the counter-party 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.
Interested parties have been given a 60-day comment period to respond.