(Dec. 18, 2020) Well-capitalized, federally insured credit unions could count subordinated debt as capital for risk-based net worth purposes under a new rule approved by the NCUA Board at its meeting Thursday.
The decision has been long sought by the state system, which would bring regulation of federally insured credit unions in line with regulations of some states that already allow their credit unions to issue secondary capital, including in the form of subordinated debt.
Thursday’s meeting was the first of two meetings for the board this week; it also meets today to consider its 2021 budget and the overhead transfer rate (OTR); see story below.
Key provisions of the final rule (137 pages long), approved unanimously by the board, 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 5 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 are 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 for the final rule is Jan. 1, 2022 (which coincides with implementation of the new risk-based capital rule).
The final rule also grandfathers any secondary capital issued before the effective date of this final rule and preserves that capital’s Regulatory Capital treatment for 20 years after the effective date, the agency said. The “grandfathered secondary capital” generally, according to NCUA, remains subject to requirements in the agency’s current secondary capital rule.
The agency also noted a number of additions and amendments to other parts and sections of NCUA’s regulations through the new rule, including:
- Cohering changes to part 741 of NCUA rules to account for the other changes proposed in the final rule that apply to federally insured, state-chartered credit unions (FISCUs);
- A new section addressing limits on loans to other credit unions;
- An expansion of the borrowing rule to clarify that federal credit unions (FCUs) can borrow from any source;
- Revisions to the final RBC Rule and the payout priorities in an involuntary liquidation rule to account for subordinated debt and grandfathered secondary capital.
Several changes in the final from the proposal have also been made, the agency said, including:
- Amendment of the definition of “accredited Investor;”
- Provision of a longer timeframe in which to issue subordinated debt after approval;
- Reduction in the required number of years of pro forma financial statements an issuing credit union must provide with its application (from five years to two years);
- Clarification of the prohibition on subordinated debt issuances outside of the United States;
- Clarification that the NCUA Board will publish a fee schedule only if it makes a determination to charge a fee.
In announcing the unanimous vote on the new rule, NCUA Board Chairman Rodney Hood said he was pleased with the balance struck with the final rule. “I support giving complex credit unions the authority to prudently use subordinated debt as an additional tool to comply with risk-based capital requirements, and newly chartered credit unions the ability to use this tool to get up and running,” he said.
Last summer, in a comment letter on the proposal, NASCUS wrote that the development of the rule is an essential complement to the implementation of a risk-based capital rule. “Including Subordinated Debt in risk-based capital ratio calculations is consistent with the statutory purposes of both state and federal credit unions and is sound public policy,” NASCUS wrote. “This rule will help credit unions and their members, protect the share insurance fund, and help place natural person credit unions in the United States on par with credit unions and other depository institutions worldwide.”
Reaction from the banking industry to the board’s action was negative, as illustrated by comments from two of the industry’s largest advocacy groups. The American Bankers Association (ABA), in an op-ed published the day before the board acted, said it “firmly opposed” the final rule, claiming it will undermine the “statutory principle that credit unions should serve consumers of small means.” The Independent Community Bankers of America (ICBA) said in press statement Thursday that the rule will “allow outside investors to exploit the credit union tax subsidy.”
LINK:
Final rule: Subordinated debt (Parts 701, 702, 709, and 741)
(Dec. 18, 2020) NASCUS President and CEO Lucy Ito, in a press statement, praised the NCUA Board for finalizing the subordinated debt rule, noting the state system’s long support for such action.
“The state system has long said that subordinated debt should be a part of the risk-based capital framework because it encourages well-managed credit unions to attract additional loss-absorbing forms of capital that they would otherwise forego,” said NASCUS President and CEO Lucy Ito. “The risk-based capital rulemaking itself is intended to increase the capital buffer standing of a credit union before any effect on the share insurance fund, and subordinated debt is consistent with that goal.”
Ito also thanked the board for moving forward on the final rule, which has been in the works for at least four years. She said NASCUS and state regulators look forward to working closely with NCUA in preparing for the implementation of the subordinated debt rule, and related capital rules, given the state system’s familiarity and experience with this form of capital
LINK:
Press statement by Lucy Ito on subordinated debt adoption
(Dec. 18, 2020) With a rare second monthly meeting scheduled for today (Friday, Dec. 18), the full-complement NCUA Board will consider the 2021 budget for the agency, which includes an increase of 1 percentage point for the overhead transfer rate (OTR), the rate at which the agency transfers funds from the federal savings insurance fund to the operating budget of the agency to cover its “insurance-related costs.”
More coverage of the meeting, which ensues after NASCUS Report’s deadline, will be included in next week’s report.
The board is expected to approve the $342.5 million budget as proposed, although likely on a split vote. Board Member Todd Harper has voiced objection to the lack of funding for consumer protection compliance staff in the budget and has said he would not support the budget unless that funding was put into place. Board Chairman Rodney Hood has no such objections; newest Board Member Kyle Hauptman (a Republican appointee like Hood) is expected to follow Hood’s lead on the budget.
For its part, NASCUS has taken no position on the budget, except with respect to the increase in the OTR, which would be 62.3% in 2021 (up from 61.3% in 2020).
In testimony two weeks ago before the NCUA Board at its public briefing about the 2021 budget, NASCUS urged NCUA to consider making changes to how it allocates expenses through the OTR to insurance-related activities, in order to ensure balance, equity and that more funds are available to cover any losses that may occur due to the financial impact of the coronavirus crisis.
“The 1% increase in the OTR for 2021 means there will be $3.3 million less to cover losses by the fund,” NASCUS’s Lucy Ito told the board. She noted that NASCUS recognized its recommendations cannot be implemented for 2021, but that the state system hopes they would be considered for future budgets. “We want to work with NCUA,” she said.
Friday’s board session is scheduled to get underway at 10 a.m. ET, and is being live-streamed via the Internet.
LINK:
NCUA Board Agenda for the Dec. 18, 2020 meeting
(Dec. 18, 2020) In other action at Thursday’s meeting, the NCUA Board issued one final rule and three proposed regulations – with three of those approved on split votes after Board Member Todd Harper (the lone Democrat appointee on the board) voted in opposition all three times.
The board:
- Approved (unanimously), an extension to Dec. 31, 2021 for a temporary final rule that increases the maximum aggregate amount of loan participations that a federally insured credit union (FICU) may purchase from a single originating lender without seeking a waiver from NCUA to the greater of $5 million or 200% of the FICU’s net worth (up from the greater of $500 million or 100% of the FICU’s net worth). The rule had been slated to expire at year’s end. The temporary rule, adopted by the NCUA Board as a relief measure for credit unions in the midst of the coronavirus crisis last spring, took effect April 21.
- Issued a proposed rule (on a 2-1 vote) on field of membership shared facility requirements (under Part 701, Appendix B, of agency rules) that NCUA said is intended to modernize requirements related to service facilities for multiple common bond (MCB) federal credit unions (FCUs). NCUA said the proposal includes any shared branch, shared ATM, or shared electronic facility in the definition of “service facility” for an MCB FCU that participates in a shared branching network. “The FCU need not be an owner of the shared branch network for the shared branch or shared ATM to be a service facility,” the agency said. “These changes would apply to the definition of service facility both for additions of select groups to MCB FCUs and for expansions into underserved areas.” Harper said he questioned the proposal’s ability, without changes, to increase service to underserved areas. The proposal will have a 30-day comment period.
- Released a second proposed rule (on a 2-1 vote), this one on mortgage servicing rights (under Parts 703 and 721 of agency rules), which would amend the agency’s investment regulation to permit FCUs to purchase mortgage servicing rights from other federally insured credit unions subject to certain conditions. Harper called the proposal “half baked,” but said he could find a way to support a final rule if changes were made. The proposal will be issued with a 30-day comment period.
- Advanced yet a third proposed rule – this one on overdraft policy (under Part 701 of NCUA rules) – also on a 2-1 vote. The proposal would remove the requirement that an FCU’s written overdraft policy establish a 45-day time limit for a member to either deposit funds or obtain an approved loan from the FCU to cover each overdraft, and replace it with a requirement that the written policy must establish a specific time limit that is “both reasonable and applicable to all members for a member either to deposit funds or obtain an approved loan from the FCU to cover each overdraft.” In May, the board tabled a proposed interim final rule to let FCUs decide how long members have to resolve account overdrafts. The proposal was tabled after failing to win a second from one of two board members when Chairman Hood asked for it (both members Harper and McWatters expressed opposition to a final rule). Back in May, Harper said the rule would (among other things) allow credit unions to garnish members’ income – including any economic stimulus relief funds – to pay off overdraft debt. Harper reiterated his objections Thursday (“I couldn’t support it then, I can’t now,” he said). Comments are due 30 days after publication in the Federal Register.
The board also set the “normal operating level” for the National Credit Union Share Insurance Fund (NCUSIF) at 1.38 for the coming year, no change from 2020. The NOL represents the target level of reserves in the fund relative to shares insured (referred to as the equity level). Generally, it is the level of reserves the board believes is needed to deal with anticipated losses from credit unions (if any) throughout the year, without lowering the reserving rate below 1.20%, the point at which an insurance premium would be required.
Along those lines, staff told Board Member Harper that it estimates the equity level of the fund at year-end will be 1.32% — well above the level at which a premium would be required. Agreeing with staff that chances of a premium in 2021 now look “next to zero,” Harper said that would be “welcome news to many credit unions.”
LINKS:
Temporary Final Rule, Regulatory Relief in Response to COVID-19
Proposed rule, Field of Membership Shared Facility Requirements
Proposed Rule, Mortgage Servicing Rights
Proposed Rule, Part 701, Overdraft Policy.
Board Briefing, Share Insurance Fund 2021 Normal Operating Level
(Dec. 18, 2020) Kyle Hauptman, sworn in as the latest (and 24th) member of the NCUA Board this week prior to participation in the Thursday and today’s board meetings, said he has three priorities as a board member: managing the fallout from the current pandemic and economic downturn, expanding the role of technology, and aligning incentives.
“Credit unions were chartered to serve those of modest means. I plan to work with credit unions, my fellow board members, and Congress on solutions for those facing financial stress,” said Hauptman in a release from NCUA. Echoing comments he made to the Senate Banking Committee last summer during his confirmation hearing, Hauptman added that he wants to “expand technology’s role in reaching the underserved because innovation can provide more inclusive financial services.
The newest board member also said that the practice of less-frequent exam cycles for credit unions with the highest marks “will incent them to maintain that benefit and allow the NCUA to focus more of its attention on problematic credit unions.”
Hauptman, nominated June 18 to the NCUA Board by President Donald Trump, has most recently served as a staff director for the Senate Banking Committee Economic Policy subcommittee and as an economic policy advisor to Sen. Tom Cotton (R-Ark.). He worked on the 2016 Trump presidential transition team and served as a policy advisor on financial services for 2012 Republican presidential nominee Mitt Romney (now a U.S. senator representing Utah).
According to NCUA’s release Monday, Hauptman holds a master’s in business administration from Columbia Business School and a bachelor of arts from University of California, Los Angeles
LINK:
Hauptman Sworn in as NCUA Board Member
(Dec. 18, 2020) A new proposal that would require financial institutions to provide “prompt notification” to their federal regulators upon occurrence of a security incident may be coming to an NCUA Board meeting in the not-so-distant future.
This week, federal banking regulators released a joint proposal (with a 90-day comment period) requiring banks to provide the notification no later than 36 hours after the banking organization believes in good faith that an incident occurred. The notification requirement, the proposal states, is intended to serve as an early alert to a banking organization’s primary federal regulator “and is not intended to provide an assessment of the incident.”
NCUA was not included in the joint release. However, given the scope of the proposal (and the recent highly publicized SolarWinds hack) it’s possible the credit union regulator may soon issue its own version for entities under its supervision.
However, the bank regulators’ proposal does something NCUA cannot now do: require a bank service provider to notify at least two individuals at affected banking organization customers immediately after the bank service provider experiences a computer-security incident that it believes in good faith could disrupt, degrade, or impair services provided for four or more hours.
Also this week, the FDIC for the first time included consideration of competition presented by credit unions when less-than-well-capitalized banks are facing interest rate restrictions by the regulator. Under the new rule adopted by the agency’s board, interest rates offered by credit unions in a market area could be cited by a bank as a way of mitigating the level of restrictions.
(Dec. 18, 2020) NASCUS is in touch with federal authorities about the recent – and some say catastrophic – hack of IT systems by a nation-state hacker group that was revealed over last weekend through products offered by IT software provider SolarWinds.
The hack, according to documents filed by SolarWinds early this week with the Securities and Exchange Commission (SEC), appears to have affected about 18,000 of the firm’s 300,000 customers. The hackers reportedly inserted malware into updates for Orion, a software application by SolarWinds for IT inventory management and monitoring. The versions affected were 2019.4 through 2020.2.1, released between March 2020 and June 2020. According to reports, the malware allowed attackers to deploy additional and highly stealthy malware on the networks of SolarWinds customers. SolarWinds has not yet said how hackers breached its own network.
However, as indicated by the relatively narrow scope of those affected by the hack, the attack was targeted to specific groups using the software, including the Treasury Department, and the Department of Commerce’s National Telecommunications and Information Administration (NTIA).
Other federal government customers known to be using the software (but which may or may not be affected by the hack) include the Cybersecurity and Infrastructure Security Agency (CISA), U.S. Cyber Command, the Departments of Defense, Homeland Security, Energy and Veterans Affairs, the FBI, and others. Customers in other countries may also have been affected, including governments.
NASCUS is participating in a number of conversations among federal regulators regarding the hack, most of which are confidential, and monitoring developments. However, during the conversations, groups such as NASCUS have been urged to encourage their members to review the CISA emergency directive on the compromise and plug into the agency for updates as they become available.
LINK:
CISA emergency directive on SolarWinds/Orion management products
(Dec. 18, 2020) The Credit Union Department of the Washington Department of Financial Institutions has two job openings (which are posted on nascus.org right now): Financial Examiner 2-3 and Financial Examiner Supervisor. See the link to our “state job announcements” on the website … A predicted collapse did not materialize of some financial institutions and others due to over-investment in leveraged loans and collateralized loan obligations (CLO) as a result of the financial impact of the coronavirus crisis, according to a report issued this week. The report indicated that’s because of large banks’ strong capital positions and other factors. The new report issued by the congressional watchdog Government Accountability Office (GAO) added that federal regulators remain cautious about financial stability and urged the Treasury Secretary and Congress to take action … Due to the upcoming holidays, NASCUS Report will be published early next week, on Wednesday (Dec. 23). The following week (Dec. 28-Jan. 1) NASCUS Report will be taking a break, with publication resuming the following week (Jan. 4).