OCC Issues Proposal on Credit Rating Alternatives

WASHINGTON — The Office of the Comptroller of the Currency released a proposal Tuesday that would remove references to credit ratings from its regulations, and posted guidance to help banks evaluate investment risks.

The Dodd-Frank Act requires federal agencies to review regulations that required banks to use credit ratings to asses the creditworthiness of a security or money market instrument. Under the law, regulators must modify the rules to remove the references to credit ratings, and substitute them with an alternative standard.

The OCC's proposal would generally require banks to make the same assessment of a security's creditworthiness that is currently required for the purchases of unrated securities. The proposal and the guidance also clarifies the definition of "investment grade" to mean that "the issuer of a security has an adequate capacity to meet financial commitments under the security for the projected life of the asset or exposure."

"While external credit ratings and assessments remain valuable sources of information and provide national banks with a standardized credit risk indicator, banks must supplement the external ratings with due diligence processes and analyses that are appropriate for the bank's risk profile and for the size and complexity of the instrument," the proposal says.

The comment period is open for 30 days.

The OCC and the Office of Thrift Supervision released advanced notices of proposed rulemakings last year that outlined four alternatives to credit ratings as a means for evaluating risk in non-capital regulations. But the industry has said credit ratings continue to be the most cost-effective and useful tool for evaluating risk, and argued the changes could be especially burdensome for small banks.