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Home Legal

ABA Condemns NCUA’s Subordinated Debt Proposal

July 9, 2020
Reading Time: 1 min read

In a comment letter to the National Credit Union Administration on Wednesday, the American Bankers Association called for the withdrawal of a proposal that would allow large credit unions to issue subordinated debt for regulatory capital purposes from outside for-profit investors—such as corporate debt markets—while maintaining their tax-exempt status. ABA noted that the rule lacks a reasonable basis, given that more than 98% of all credit unions currently meet the NCUA’s net worth requirement and more than 98% of complex credit unions meet risk-based capital requirements.

ABA also emphasized that the proposal does not have a legal basis under the Federal Credit Union Act, which does not authorize the issuance of debt for capital purposes. It also fails to place reasonable limits on the amount of subordinated debt credit unions may issue, which could lead to rapid credit union growth and increase systemic risk.

Finally, ABA pointed out that the rule requires the subordinated debt to have capital-like features, negating the basis for the tax exemption for state-chartered credit unions, which is predicated upon the prohibition of issuing capital stock. “The introduction of outside investment into complex credit unions . . . and counting such investments as ‘capital’ and thus akin to ownership for purposes of the tax policy discussion, likewise raises the question whether such federally-chartered complex credit unions should continue to be entitled to such an exemption,” the association said.

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