Proposal would allow corporates to invest in credit union subordinated debt – but only after capital deduction

Corporate credit unions could invest in subordinated debt instruments issued by credit unions – action proposed in a regulation last month – but would be required to fully deduct the amount of the instrument from their top capital amounts, the federal credit union regulator proposed Thursday.

The National Credit Union Administration (NCUA) Board issued the proposal on corporate credit union investments in credit union subordinated debt as part of a larger proposal about corporate credit union regulations. The subordinated debt provision, however, is likely a next step for the agency as it rolls out its proposal allowing some credit unions to issue subordinated debt that would count toward their risk-based capital requirements.

In its proposal Thursday, the NCUA Board said it clarified that corporate credit unions may purchase subordinated debt instruments of natural person credit unions under a corporate credit union’s lending authority. The authority, the agency said, is derived from corporate credit union lending authority because subordinated debt instruments are issued under a natural person credit union’s borrowing authority. “Treating the purchase of such subordinated debt instruments as lending would ensure consistent treatment between natural person credit unions and corporate credit unions,” the agency said. “The proposed rule would not explicitly state that a corporate credit union may purchase a natural person credit union subordinate debt instrument because the Board believes corporate credit unions’ current lending authority is currently sufficiently broad to include purchasing subordinated debt instruments.”

However, the proposal states, the full amount of any investment in a subordinated debt instrument would have to be deducted from the corporate’s tier 1 capital “to ensure consistent treatment between investments in the capital of other corporate credit unions and natural person credit unions.”

“Corporate credit unions are currently required to deduct from tier 1 capital any investments in perpetual contributed capital and nonperpetual capital accounts that are maintained at other corporate credit unions,” NCUA said in its proposal. “The Board believes that investments in natural person credit union subordinated debt instruments should be treated similarly as such instruments may qualify as regulatory capital for the natural person credit union.”

Further, the proposal states, NCUA is also concerned about systemic risk if corporate credit unions own a significant amount of natural person credit union-issued subordinated debt.

The proposal also asserts that a natural person credit union subordinated debt instrument would be in a “first loss position,” even before the NCUSIF and any private insurance fund or entity. “Therefore, an involuntary liquidation of the issuing credit union would potentially mean large, and likely total, losses for the holders of those subordinated obligations,” the proposal states. “The Board believes that fully deducting such instruments from tier 1 capital will ensure any potential losses do not affect the capital position of the investing corporate credit union. This measured approach strikes the right balance between providing corporate credit unions the flexibility to purchase natural person credit union subordinated debt instruments and avoiding undue systemic risk to the credit union system.”

Other provisions of the proposed rule for corporate credit unions are:

  • Permitting a corporate credit union to make a minimal investment in a credit union service organization (CUSO) without the CUSO being classified as a corporate CUSO;
  • Expanding the categories of senior staff positions at member credit unions eligible to serve on a corporate credit union’s board;
  • Removing the minimum experience and independence requirement for a corporate credit union’s enterprise risk management expert;
  • Codifying the current list of permissible activities for a corporate CUSO;
  • Clarifying the definition of a collateralized debt obligation;
  • Simplifying the requirement for net interest income modeling.

The proposal was issed for a 60-day comment period.

Proposed Rule, Part 704, Corporate Credit Unions

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