Subordinated debt, related corporate rules finalized

(Feb. 26, 2021) Final rules on subordinated debt and corporate credit unions were finally published in the Federal Register this week, completing the action on the final rules and opening the comment period on the proposal.

The rule on subordinated debt takes effect Jan. 1, 2022; the rule on corporate credit unions takes effect the same date.

Adopted in December by the NCUA Board, the subordinated debt rule would allow well-capitalized FICUs 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 regulation 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.

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

Final rule: Subordinated Debt

Final rule: Corporate credit unions