Letter reminds CUs sub debt rule will affect secondary capital

(Nov. 12, 2021) Any issuances of secondary capital not completed by Jan. 1 will be subject to the requirements of the new subordinated debt rule, which becomes effective on that date, according to a letter published late last week by NCUA.

NASCUS has published a summary of the letter, which like all summaries from NASCUS, is available to members only.

The NCUA letter to credit unions ((LTCU 21-CU-13) states there is one potential exception: low-income designated credit unions are allowed to issue secondary capital approved in 2021, irrespective of the date of issuance, under a proposed rule issued by the agency in September. A final version of the rule, the letter stated, will be considered by the NCUA Board by Jan. 1.

The subordinated debt rule was approved by the NCUA Board nearly a year ago (in December 2020), with an effective date of the beginning of the new year. That rule allows well-capitalized, low-income designated, federally insured credit unions to count subordinated debt as capital for risk-based net worth purposes.

The proposal issued in September would amend that rule, slightly, by accommodating low-income credit union (LICU) access to federal investment programs, most notably the Treasury Department’s Emergency Capital Investment Program (ECIP). That program directs Treasury to make investments in “eligible institutions” to financially support small businesses and consumers in low-income and underserved communities. Those institutions include federally insured credit unions that are minority depository institutions (MDIs) or community development financial institutions (CDFIs) that are in sound financial condition. The investments are made in the form of subordinated debt.

Funding of secondary capital approved under the current rule would be permitted under the proposal beyond 2021, without the need to reapply under the subordinated debt rule – thus giving those credit unions a measure of regulatory relief.

“Given the current 45-day review period for secondary capital plans, any low-income credit union still planning to submit a secondary capital plan should do so as soon as possible,” the NCUA letter states. “Further, if a low-income designated credit union plans to submit a secondary capital plan this year, it should consider using the application requirements in section 702.408 of the final subordinated debt rule when drafting its plan and submitting an application.

“This can help avoid having to resubmit documentation as long as the application meets the requirements of the final rule,” NCUA wrote.


NASCUS Summary: NCUA LTCU 21-CU-13, Subordinated Debt Final Rule Effective Jan. 1, 2022 (members only)

NCUA LTCU 21-CU-13: Subordinated Debt Final Rule Effective January 1, 2022