(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.”
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(Oct. 22, 2021) Eligible low-income credit unions (LICUs) may accept 30-year subordinated debt investments from a Treasury program meant to encourage the institutions to augment efforts to support small businesses and consumers, NCUA announced Thursday.
In a letter to credit unions (LTCU 21-CU-11) Thursday, the agency said the LICUs may accept the subordinated debt investments from the Treasury Department’s Emergency Capital Investment Program (ECIP). In addition, the agency said, the credit union may treat the investment as secondary capital in accordance with NCUA regulations. That is, provided that the LICU has an agency-approved secondary capital plan by year’s end.
According to NCUA Board Chairman Harper, the policy will allow ECIP-participating credit unions to fulfill that statutory mission and advance economic equity and justice. “Going forward, the NCUA will pursue additional action to permit ECIP funding to count as regulatory capital for the entire time it is held,” he said.
The agency’s subordinated debt rule, adopted in January, includes a 20-year limitation on the regulatory capital treatment of “Grandfathered Secondary Capital,” NCUA said. That is defined as any secondary capital issued under a secondary capital plan that was approved by the NCUA before Jan. 1, 2022. The agency indicated it plans, in the future, to clarify that ECIP participating credit unions may count ECIP funding as regulatory capital for the entire time it is held.
NCUA said the latest LTCU is the second step in a three-step process for ensuring credit unions can use ECIP. The first step was a proposed rule issued earlier this year to allow eligible credit unions to accept ECIP funding in 2022 without having to fill out a new subordinated debt application after the effective date of the new rule. The third step, according to the agency, will be more NCUA action – “sometime in 2022” — to permit ECIP funding to count as regulatory capital for the entire time it is held.
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NCUA LTCU 21-CU-11: Emergency Capital Investment Program Participation
(Sept. 24, 2021) A proposed change to the new subordinated debt rule to accommodate credit union access to federal investment programs – but making no other changes to the rule taking effect Jan. 1 – was approved unanimously for a 30-day comment period by the NCUA Board Thursday.
In other action, the board agreed – on a split vote, with Chairman Todd Harper dissenting – to act on three outstanding proposed rules over the course of the next three, monthly board meetings dealing with credit union service organization (CUSO) authorities, field of membership (FOM) shared service facility requirements, and mortgage servicing rights (see following item).
The subordinated debt proposal, 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).
According to NCUA, the benefit would accrue to the LICUs that are either participating in the Treasury Department’s Emergency Capital Investment Program (ECIP) — or other programs administered by the federal government – “that can be used to fund secondary capital, if they do not receive the funds for such programs by Dec. 31, 2021.”
This proposal also provides that the expiration of regulatory capital treatment for the issuances is the later of 20 years from the date of issuance or Jan. 1, 2042, according to NCUA.
The ECIP (created by this year’s Consolidated Appropriations Act) 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.
However, although LICUs are also eligible to apply to NCUA for secondary capital treatment for the investments, under current rules those institutions approved by NCUA for the program and not funded by year’s end would have to reapply for regulatory capital treatment under the subordinated debt rule.
The proposal would permit funding of secondary capital approved under the current rule, beyond 2021, without the need to reapply under the subordinated debt rule – thus giving those credit unions a measure of regulatory relief.
According to NCUA, as of Sept. 17, 44 LICUs have received approval to issue secondary capital under the ECIP for an aggregate amount of approximately $1.9 billion.
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