The Office of the Comptroller of the Currency (OCC) announced on June 26 that it had published final rules that remove references to credit ratings from its regulations pertaining to investment securities, securities offerings, and foreign bank capital equivalency deposits at 12 CFR 1, 16, 28, and 160. In finalizing the regulation, the OCC explained that "to determine whether a security is “investment grade,” banks must determine that the probability of default by the obligor is low and the full and timely repayment of principal and interest is expected. …[B]anks may not rely exclusively on external credit ratings, but they may continue to use such ratings as part of their determinations. Consistent with existing rules and guidance, an institution should supplement any consideration of external ratings with due diligence processes and additional analyses that are appropriate for the institution’s risk profile and for the size and complexity of the instrument. In other words, a security rated in the top four rating categories by a nationally recognized statistical rating organization is not automatically deemed to satisfy the revised “investment grade” standard."
The OCC also has revised its regulations pertaining to financial subsidiaries of national banks at 12 CFR 5 to better reflect the language of the underlying statute, as amended by section 939(d) of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd–Frank Act). Pursuant to Section 939(d) of the Dodd–Frank Act, "a national bank that is one of the 100 largest insured banks may control a financial subsidiary, directly or indirectly, or hold an interest in a financial subsidiary if the bank has not fewer than one issue of outstanding debt that meets such standards of creditworthiness or other criteria as the Secretary of the Treasury and the Federal Reserve Board may jointly establish. As is the case under current law, this statutory creditworthiness requirement does not apply to an insured depository institution that is not among the 100 largest insured depository institutions. Therefore, this revision will not affect the ability of such an institution to control or hold an interest in a financial subsidiary." As neither Treasury nor the Federal Reserve have establish such standards, they do not apply at this time. "Importantly, however, the requirements at 12 CFR 5.39(g)(1) and (2) still apply. These provisions generally provide that a national bank may control or hold an interest in a financial subsidiary only if it and each depository institution affiliate is well-capitalized and well-managed, and the aggregate consolidated total assets of all financial subsidiaries of the national bank do not exceed the lesser of 45 percent of the consolidated total assets of the parent bank or $50 billion."
The OCC also has published related guidance to assist national banks and federal savings associations in their exercise of due diligence to determine whether particular securities are “investment grade” when assessing credit risk for portfolio investments.
The final rules and guidance were published in the Federal Register on June 13. The revisions to the OCC’s rules at 12 CFR 1, 16, 28, and 160 will become effective on January 1, 2013. The amendments to the OCC’s regulations pertaining to financial subsidiaries of national banks became effective immediately upon publication.