UPDATED: Six weeks later, proposed credit union subordinated debt rule finally to begin four-month comment period

A proposed rule on subordinated debt for credit unions was published Tuesday in the Federal Register, officially opening the four-month-long comment period on the proposal, six weeks after the regulator board voted to issue it for comment.

The proposal, at 275 pages one of the longest issued by the National Credit Union Administration (NCUA), was issued for a 120-day comment period. Comments are due July 8.

The NCUA Board voted unanimously Jan. 23 to issue the proposal, which would allow well-capitalized credit unions to count subordinated debt as capital for risk-based net worth purposes (which is the fundamental capital pool for mitigating credit union risk in their lending and investment portfolios).

Key provisions of the proposal include:

  • Permission for low-income-designated credit unions (LICUs), complex credit unions, and new credit unions to issue subordinated debt for purposes of regulatory capital treatment.
  • A maximum maturity of 20 years to be imposed on debt issued (with a minimum maturity of five years), and a minimum denomination of $100,000. The agency noted the maturity limit helps to clarify that the financial instruments issued are debt – and not equity in the credit unions (which are solely owned by the members; credit unions do not issue stock).
  • Prohibitions on a credit union from being both an issuer and investor unless the credit union meets certain conditions related to mergers.

NCUA said it adopted the long 120-day comment period (rather than a more typical 90-day period) to account for the relatively complex nature and 275-page length of the proposal, one of the longest the agency has ever published.

According to the agency, there are 2,628 LICUs (complex and non-complex) that are “currently eligible” for subordinated debt under the new rule (LICUs may already build regulatory capital from outside sources). The new rule would also open the door to as many as 285 additional non-LICU, “complex” credit unions (281 existing, “complex,” and an estimated four new credit unions) to be eligible to take advantage of the new rule.NCUA said up to 2,409 non-complex (and non-LICU) credit unions would not be eligible to issue subordinated debt.

NCUA proposed rule: Subordinated debt