ALEXANDRIA, Va.-The NCUA Board last week approved a new rule that will replace the current Wall Street rating system as a criteria for determining the permissibility of an investment with two new standards: whether the investment is determined to be of "investment grade" and whether it contains a "minimal amount of credit risk."
The changes are similar to those adopted by the Securities and Exchange Commission and banking regulators as required by the Dodd-Frank Act, after many of the securities highly rated by Moody's, Standards & Poors and the other Wall Street agencies turned out to be erroneous. Falsely rated securities have also been cited as a major reason for the failure of the five corporate credit unions, which relied heavily on the agencies' ratings when they bought tens of billions of dollars of what turned out to be faulty mortgage-backed securities.
The new rule defines an investment grade security as one with which the credit union determines that the issuer has an adequate capacity to meet all 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 where the credit union determines that the issuer has a very strong capacity to meet all financial commitments under the security for the projected life of the asset or exposure, even under adverse economic conditions. Among the factors that may be considered are: securities-related research, credit spread, default statistics, internal or external credit risk assessments or inclusion on an index.
In response, NAFCU CEO Fred R. Becker issued a statement saying, "NAFCU remains concerned with the NCUA's final rule removing references to credit rating agencies. However, since credit unions will still be able to rely on credit ratings to measure risk, the NCUA needs to clarify this with examiners to ensure that the rule is applied uniformly and correctly across the industry.
In other actions taken by the board:
* It approved a 2013 budget of $6.145 million for oversight of the Temporary Corporate Credit Union Stabilization Fund and related activities in 2013. The 2013 budget is 20% lower than the 2012 budget and contains no net change in staffing, the agency said. NCUA added that the Stabilization Fund 2013 budget represents less than 0.02% of the failed corporate credit unions' legacy assets. The budget covers the activities of the NCUA Guaranteed Notes Securities Management and Oversight Committee, as well as expenses incurred by other NCUA offices in support of the Corporate Resolution Plan, NCUA said.
* It approved two large community charters: for Atlantic FCU, allowing the $275 million Kenilworth, N.J.-based credit union to serve 1.3 million people in New Jersey's Essex and Union counties; and for Oklahoma City-based The Focus FCU, allowing the $90 million credit union to serve 1.2 million people surrounding Oklahoma City.