Final rules on subordinated debt, proposal on risk-based capital changes to finally be published

Final rules on subordinated debt and corporate credit unions – and a proposed rule on risk-based net worth, COVID-19 regulatory relief – are scheduled to be published in the Federal Register Tuesday, which opens the comment period on the proposal, according to filings made public Monday.

The rule on subordinated debt takes effect Jan. 1, 2022, the filings show; the rule on corporate credit unions takes effect the same date. The comment period on the proposal (which launches tomorrow) will run for 30 days.

Adopted in December by the NCUA Board, the subordinated debt rule would allow well-capitalized, federally insured credit unions to count subordinated debt as capital for risk-based net worth purposes.

Key provisions of the rule 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 effective date of the rule (Jan. 1, 2022) coincides with the implementation of new risk-based capital rules for credit unions.

The corporate rule, proposed a year ago (in February 2020) included a section on allowing corporate credit unions to purchase subordinated debt from credit unions. The bulk of the corporate rule was adopted as a final rule by the NCUA Board in October – however, the portion on purchase of subordinated debt was left out of the final rule. The board said then it would adopt that portion of the rule once it had finalized the subordinated debt final rule. Since that rule was adopted in December, the board has now finalized the subordinated debt portion of the corporate rule.

Under that provision, the final rule now makes clear that corporate credit unions may purchase subordinated debt instruments issued by natural person credit unions. The rule also specifies the capital treatment of these instruments for corporate credit unions that purchase them.

The proposal on risk-based net worth, COVID-19 regulatory relief would raise the asset threshold for defining a credit union as “complex” for purposes of being subject to any risk-based net worth requirement in the NCUA’s regulations.

The proposal, issued in January (on a 2-1 vote with now-Board Chairman Todd Harper dissenting) would raise from $50 million to $500 million the asset threshold for defining a credit union as “complex” for purposes of being subject to any risk-based net worth requirement in part 702 of the NCUA’s regulations.

According to the proposal, any risk-based net worth requirement would be applicable only to a federally insured, natural-person credit union with quarter-end assets that exceed $500 million and a risk-based net worth requirement that exceeds 6%. The change would remain in place until the risk-based capital rule, which also applies only to institutions exceeding $500 million, goes into effect Jan. 1, 2022.

NCUA, noting the difficulties posed by the ongoing COVID-19 pandemic, said the proposal is aimed at providing a measure of regulatory relief to further encourage credit unions to ensure access to credit and other services. It said the proposal would provide relief for a “significant number” of credit unions; in all, it is estimated to affect 67 federally insured credit unions, which the agency said represent less than 1% of industry assets.

Comments are due March 25.

Final rule: Subordinated Debt

Final rule: Corporate credit unions

Risk-Based Net Worth – COVID-19 Regulatory Relief