WASHINGTON (CN) – The Office of the Comptroller of the Currency dropped requirements that national banks and federal savings and loans use credit ratings agencies to demonstrate that their investments securities are “investment grade.”
In place of credit ratings agencies the comptroller issued guidance outlining the steps institutions must take to demonstrate that a security meets the credit quality standards under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
To meet the standard, banks must show that a security has low risk of default and that full and timely repayment of the principal and interest is expected over the life of the investment.
Those steps include demonstrating that the securities meet industry standard underwriting requirements, and that the institution understands the potential impact of a deterioration in the performance of the security and any internal performance related changes in the obligations of the investment. The institution also must have a demonstrated understanding of the loss allocation rules, the definition of default, and any swap agreements with counterparties to which the security is subject.