ABA opposes proposed changes to credit union subordinated debt rule

In comments today, the American Bankers Association opposed an effort by the National Credit Union Administration to amend its current subordinated debt rule to expand credit unions’ ability to issue subordinated debt for the purposes of regulatory capital treatment. The proposed rule would replace the maximum maturity of subordinated debt notes with a requirement that any credit union seeking to issue notes with maturities longer than 20 years demonstrate how such instruments would continue to be considered “debt.” It would also extend the regulatory capital treatment of “grandfathered secondary capital” from 20 years to 30 years.

ABA said allowing credit unions to issue subordinated debt would violate the Federal Credit Union Act, which states that credit unions serve people of modest means. The association also noted that only Congress has the authority to permit the issuance of these notes to satisfy credit union capital requirements.

In addition, by providing more flexibility for credit unions to issue debt notes, the proposal encroaches on bank-like activity, further calling into question the reasoning behind credit unions’ federal income tax exemption, ABA said. “The basis for the tax-exempt status stems from credit unions’ nonprofit cooperative ownership and prohibition on issuing capital stock. However, gaining access to funding other than through retained earnings inherently has ‘stock-like’ features.”