Sub debt amendment OK, but other changes needed

(Oct. 29, 2021) Now is the time to consider additional changes to the new subordinated debt rule – rather than adopt just one change to the rule — to ensure the rule is properly calibrated for use by low-income credit unions (LICUs), NASCUS told NCUA in a comment letter this week.

The NASCUS comment letter addressed a proposal issued Sept. 23 by the NCUA Board to amend its new subordinated debt rule (which takes effect Jan. 1) to accommodate credit union access to federal investment programs. No other changes to the new rule were offered. The proposed amendment put forward last month, according to NCUA staff, would amend the definition of “grandfathered secondary capital” to include any secondary capital issued to the U.S. government or one of its subdivisions under an application approved before Jan. 1, “irrespective of the date of issuance” (that is, when funds are issued), primarily to benefit low-income credit unions (LICUs).

The letter noted that the proposed amendment is necessary to permit LICUs to participate in the Treasury Department’s Emergency Capital Investment Program (ECIP) without having to reapply for capital treatment rule after the subordinated debt rule takes effect at the start of the new year. The association said it was fine with that change.

However, NASCUS added, the state system also supports additional changes to the subordinated debt rule to “maximize ECIP benefits to LICUs and further reduce regulatory burden.”

NASCUS wrote that it “strongly urged” the agency to “continue evaluating whether the Subordinated Debt rule is properly calibrated to the distinct features of the LICU ecosystem so as not to impede the important work done by these credit unions.”

For example, NASCUS argued, the agency should amend the final subordinated debt rule to allow instruments with 30-year maturities. “While NCUA will now permit LICUs to accept 30-year subordinated debt investment from the ECIP, the agency maintains that LICUs may only recognize 20 years of capital benefit from the funding,” NASCUS wrote. “There is no such fixed 20-year maturity limit in the current secondary capital rule for LICUs, and NCUA would be well within the spirit of the new final subordinated debt rule to allow ‘Grandfathered Secondary Capital’ to maintain the flexibility to set maturity limits based on funding needs and the marketplace.”

In general, the agency’s subordinated debt rule should provide for automatic exceptions to accommodate the terms of subsequent emergency government programs, NASCUS recommended. “Given the lingering effects of the pandemic, it is likely there could be additional Treasury Department funding programs and NCUA should provide certainty that credit unions will have equal opportunity to participate in those,” NASCUS wrote. “A basic sunset provision could provide compatibility between the Subordinated Debt rule and the rules of qualifying government funding program.”


Subordinated Debt 2021