ALEXANDRIA, Va.–Noting it was a “long time coming” after six years in the making, the NCUA board has voted 3-0 in favor of expanded subordinated debt authority for natural-person credit unions.
The new rule follows a proposal first approved by the board in January of this year and amends the rules to—in addition to low-income credit unions—further permit complex CUs and new credit unions to issue subordinated debt for purposes of regular capital treatment and have it count as capital for risk-based capital purposes.
The final rules, involving Parts 701, 702, 709, and 741 of the FCU Act, do not change the ability of low-income credit unions to accept secondary capital.
NCUA staff told the board the final rule reflects lessons learned from the current subordinated debt framework, aims to provide regulatory relief, and reflects revisions. Moreover, staff said the agency is seeking to consolidate all the capital-related regulations for natural-person CUs in a single place under part 702.
After the proposed rule was issued in January, NCUA received 171 comment letters, 125 of which were based on the same form letter that opposed the proposal, NCUA staff said. The remaining letters supported the proposal, but each requested at least one change.
As a result, staff said a number of amendments, including reflecting a change in the SEC’s definition of an “accredited investor” and ensuring a CU issuing debt may do so only in the United States (with a prohibition on non-U.S. investors holding or purchasing subordinated debt notes).
The new subordinate debt rules go into effect on Jan. 1, 2022. During 2021, any secondary capital applications by CUs that are approved must be fully issued by Dec. 31, 2021; if not the approval will expire and be subject to requirements of the final subordinated debt rule.
Began With Working Group
NCUA Chairman Rodney Hood noted the consideration of new forms of capital began with a working group created by former NCUA Chairman Debbie Matz in 2014, and was subsequently discussed at other NCUA board meetings.
“As I said in January, many low-income credit unions and other financial institutions have a proven record of using subordinated debt to protect against future losses,” said Hood. “Federal credit unions borrowing in the form of subordinated debt is squarely within the statutory authority provided under the law.”
Hood said the expanded authority will allow newly chartered CUs to get “up and running,” and overall provides greater clarity for both CUs and investors.
In addition, said Hood, the new rule “includes prudential safeguards for CUs, investors and the NCUSIF.”
‘Capital is King’
NCUA Board Member Todd Harper noted he has said from the beginning that “capital is king” and it remains true.
“Clarifying the ability of certain credit unions to issue subordinated debt will better protect federally insured credit unions, their members, and taxpayers from losses to the Share Insurance Fund by creating a buffer against the capital losses caused by economic downturns, fraud, and management errors. In turn, that capital will strengthen the resilience of the system,” said Harper. “In this final rule, we create an overarching framework to govern the subordinated debt issued by low-income credit unions, complex credit unions, new credit unions, and credit unions anticipating becoming complex or low-income within 24 months of issuing the subordinated debt. In developing this rule, staff have also constructed a workable and appropriate regulatory structure that will well serve the credit unions comprising 91 percent of the system’s assets.”
Harper said that to date 75 credit unions have issued $349 million in secondary capital.
Harper said he has heard from some who have expressed apprehension the regulation will hamper the efforts of smaller community development credit unions to obtain modest amounts of secondary capital.
“Before voting today, I want to ensure that this final rule will neither cut off that capital pipeline nor make it cost prohibitive to access small amounts of secondary capital,” said Harper.
Harper said other important aspects of the rule include:
- A prohibition on credit unions that issue subordinated debt from purchasing the subordinated debt of other credit unions
- Preservation of the ability of the agency to ask for additional information and documents, when needed, to assess the viability of the overall transaction
- The establishment of conflict-of-interest provisions
Questions of Awareness
New NCUA Board Member Kyle Hauptman asked whether the agency should engage in any efforts to publicize the expanded availability of subordinated debt by credit unions. While acknowledging it’s not the job of the agency to do so, he also observed, “If this rule results in an additional supply of debt, unless additional demand emerges the price of the debt is going to be higher.”
NASCUS Response
In response to the NCUA board's move, Lucy Ito, president/CEO of NASCUS, said, "The state system has long said that subordinated debt should be a part of the risk-based capital framework because it encourages well-managed credit unions to attract additional loss-absorbing forms of capital that they would otherwise forego. The risk-based capital rulemaking itself is intended to increase the capital buffer standing of a credit union before any effect on the share insurance fund, and subordinated debt is consistent with that goal. NASCUS and state regulators look forward to working closely with NCUA in preparing for the implementation of the subordinated debt rule, and related capital rules, given the state system’s familiarity and experience with this form of capital. The state system thanks the NCUA Board for moving forward on this final rule, which has been the focus of intense work over the last four years."