On February 14, 2018, the FDIC Board of Directors adopted a rule to permit the removal of "external credit ratings".
"The final rule removes references to external credit ratings and replaces them with appropriate standards of creditworthiness."
In other words, as long as a bank makes under $1 billion in total assets it doesn't need to reference external credit ratings in order to label an asset or security as "investment grade". These classifications are used for capital allocation and pledged assets. The rule reduces the need to classify assets as investment grade with a much lower bar -- as of this ruling "An entity has adequate capacity to meet financial commitments if the default risk is low, and the full and timely repayment of principal and interest is expected."
The rule also "adds cash to the list of assets eligible for pledging and separately lists Government Sponsored Enterprise obligations as a pledgeable asset category."
So mortgaged backed securities are now considered pledgeable assets as well as cash? And, if you have cash, why do you need to pledge assets?
Household Debt Jumps as 2017 marks the 5th consecutive year of annual growth based on the latest Quarterly Report on Household Debt and Credit.
The report reveals that total household debt reached a new peak in Q4 of 2017, rising $193 billion to reach $13.15 trillion. Balances climbed:
- 1.6% on mortgages,
- 0.7% on auto loans,
- 3.2% on credit cards; and,
- 1.5% on student loans.