WASHINGTON (CN) – The Federal Deposit Insurance Corporation plans to change the rating method savings and loan associations use to determine if a corporate debt security is investment grade.
The proposed ratings method complies with the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires federal agencies to do away with the mandatory use of credit ratings to evaluate the risk of investment grade securities.
Before buying corporate debt securities, savings and loans associations would have to determine that the issuer of the security has adequate capacity to meet all financial commitments under the security for the projected life of the investment.
An issuer would satisfy this requirement if, based on the assessment of the savings association, it presents a low risk of default and is likely to make full and timely repayment of principal and interest.
The assessments could include a credit rating from a registered credit ratings agency, but must include additional analysis.
The FDIC seeks public comment on what should comprise the additional analysis, and on its proposed guidelines regarding such things as the spread of points offered by the security compared to U.S. Treasuries and bonds the issuer claims are of similar quality; a study of applicable market demographics; and a close look at the issuer’s publicly available financial information.
State savings associations are forbidden from holding anything other than investment grade securities and must increase their Tier 1 capital reserves if securities considered investment grade when bought fall below that rating.
The public has until February 13 to comment on the proposed rule and guidance.