Final rule gives credit unions additional method for accumulating capital through subordinated debt

Well-capitalized, federally insured credit unions could count subordinated debt as capital for risk-based net worth purposes under a new rule approved by the board of the federal credit union regulator at its meeting Thursday.

Key provisions of the final rule (137 pages long), approved unanimously by the National Credit Union Administration (NCUA) Board, 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 is 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.
  • A section addressing new rules and limits for making loans to other credit unions, including investing in subordinated debt at those credit unions.

The rule takes effect Jan. 1, 2022 (which coincides with implementation of new risk-based capital rules for credit unions).

The agency said the final rule also grandfathers any secondary capital issued before the rule’s effective date of this final rule and preserves that capital’s regulatory capital treatment for 20 years after the effective date. The “grandfathered secondary capital” generally, the agency said, remains subject to requirements in the agency’s current secondary capital rule.

The agency also noted a number of additions and amendments to other parts and sections of NCUA’s regulations through the new rule, including:

  • A new section addressing limits on loans to other credit unions;
  • An expansion of the borrowing rule to clarify that federal credit unions (FCUs) can borrow from any source;
  • Revisions to the final risk-based capital rule and the payout priorities in an involuntary liquidation rule to account for subordinated debt and grandfathered secondary capital;
  • Cohering changes to part 741 to account for the other changes proposed in this rule that apply to federally insured, state-chartered credit unions (FISCUs).

The agency also noted several changes in the final from the proposal, including:

  • Amendment of the definition of “accredited Investor”;
  • Provision of a longer timeframe in which to issue subordinated debt after approval;
  • Reduction in the required number of years of pro forma financial statements an issuing credit union must provide with its application (from five years to two years);
  • Clarification of the prohibition on subordinated debt issuances outside of the United States;
  • Clarification that the NCUA Board will publish a fee schedule only if it makes a determination to charge a fee.

Final rule: Subordinated debt (Parts 701, 702, 709, and 741)