NCUA Finalizes Controversial Rule Allowing CUs to Issue Subordinated Debt

In a move strongly condemned by the American Bankers Association, the National Credit Union Administration today approved a final rule 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 ABA had previously called for the proposal to be withdrawn, noting that it lacked both a reasonable basis—given the fact that the vast majority of credit unions currently meet the NCUA’s net worth and risk-based capital requirements—and a legal one, as the Federal Credit Union Act does not authorize the issuance of debt for capital purposes.

“The NCUA’s disappointing decision to allow large credit unions that already benefit from a federal tax-exemption to issue subordinated debt to sophisticated, for-profit investors will only fuel their increasing market-share, crowding out smaller credit unions and community banks,” said ABA President and CEO Rob Nichols. “This rule is inconsistent with the chartered mission of credit unions to serve people of modest means and provides no demonstrable requirements credit unions actually serve those in need.”

Nichols—who wrote an op-ed earlier this week strongly opposing the rule—noted with concern that the NCUA acknowledged in its own budget that it currently lacks the expertise to oversee these financial instruments and would require the use of outside council to supervise institutions issuing subordinated debt. “Congress should be concerned about this latest step by NCUA to further blur the lines between large credit unions and tax-paying banks, while adding a new layer of risk at precisely the wrong time,” Nichols said.