WASHINGTON–Levels of subordinated debt in credit unions have surged following changes made by NCUA, according to a new analysis.
Low-income credit unions (LICUs) have at times issued subordinated debt to expand their operations, typically using the capital for lending expansion and servicing, or for the acquisition of newer and more efficient financial technology. The advantage of subordinated debt is that credit unions can make loans or provide other services to members with borrowed money that is counted as net worth and thus not counted against their capitalization.
In its report on creditunions.com, Callahan & Associated noted NCUA’s move to expand the number of credit unions eligible to issue subordinated debt to include complex credit unions (those with more than $500 million in total assets) and newly chartered credit unions has led to the source.
New Ratios
As CUToday.info has reported and as Callahan’s said in its analysis, the change was made in conjunction with the release of new regulatory capitalization ratios — risk-based capital and the Complex Credit Union Leverage Ratio — which are also designed for complex credit unions.
“Although only LICUs are permitted to include subordinated debt in net worth, complex and new credit unions can use it to bolster the new RBC value, Callahan’s stated. “By allowing these credit unions to issue subordinated debt, the NCUA is providing these institutions with a new route to adjust to the new regulatory thresholds.”
170% Increase
According to the Callahan & Associates’ analysis, the new capitalization-requirement rules spurred a 170.8% quarterly increase in the dollar value of subordinated debt issued by credit unions industrywide.
“Alongside dollar growth, the number of credit unions using this tool to increase net worth is also expanding,” Callahan & Associates stated. “As of the second quarter of 2022, 132 credit unions have issued subordinated debt. This is up from 86 institutions in the first quarter of 2022 and 80 in the fourth quarter of 2021, before the regulatory changes took effect. This increase has been driven by larger credit unions issuing subordinated debt as net worth: 64 of these 132 credit unions are complex credit unions, up from 44 in the fourth quarter of 2021.”
The full report can be found here.
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