Bank Analysis School eBook

BANK INVESTMENTS DODD-FRANK ACT

Pre-Purchase Analysis 1

Ongoing Monitoring

• Required banks to move away from relying solely on external credit ratings (e.g. Moody’s, Standard & Poor’s). • Must determine that Corporate bonds are “Investment Grade” prior to purchase. o Investment grade = low risk of default and full and timely payment of principal and interest is expected. o U.S.Treasuries,Agencies, Municipal government general obligations, and Municipal revenue bonds (for well capitalized banks) are not subject to an investment grade determination 2 . • Depth of due diligence will depend on the size of the institution as well as the complexity and risk characteristics of investments.

• Periodically after acquiring an investment, banks must determine that an issuer has adequate capacity to meet all financial commitments for the projected life of the security. o Adequate capacity to meet financial commitments = low risk of default and full and timely payment of principal and interest is expected. • Regulators expect banks to have a sufficient understanding of the credit risk in the portfolio, as well as the safety and soundness risks related to interest rate risk, operational risk, liquidity risk, and other types of risk.

1 Refer to the Summer 2013 Supervisory Insights for a matrix of factors to consider. 2 While in most cases Municipal bonds will not be subject to an investment grade determination, an initial credit assessment and ongoing monitoring should be performed on all Municipal bonds to ensure they meet safety and soundness standards.The Electronic Municipal Market Access (EMMA) web site can be used to research Municipal bonds.