(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.
LINKS:
Final rule: Subordinated Debt
Final rule: Corporate credit unions
(Jan. 15, 2021) In other action at its Thursday meeting, the NCUA Board:
- Adopted a final rule clarifying that corporate credit unions may purchase subordinated debt instruments issued by natural person credit unions (allowed under a final rule issued by NCUA late last year). The final rule also specifies the capital treatment of these instruments for corporate credit unions that purchase them. NASCUS and the state system strongly supported the subordinated debt rule, which allows well-capitalized, federally insured credit unions to count subordinated debt as capital for risk-based net worth purposes. The agency said it delayed finalizing the corporate rule, proposed in February 2020, until the subordinated debt rule itself was approved last month.
- Released (for a 30-day comment period, on a 2-1 vote with Harper dissenting) a proposed rule that would add to the agency’s list of permissible CUSO services the origination of any type of loan that a federal credit union (FCU) may originate. This expands the list of permissible loans by CUSOs from only business loans, consumer mortgage loans, student loans, and credit cards to any type of loan an FCU may originate, including, for example, automobile and small-dollar (payday) loans – the two types NCUA said would likely draw the newest involvement by CUSOs.
- Issued (for a 30-day comment period, on a 2-1 vote again with Harper voting no) a proposal raising the threshold for a credit union to be considered “complex” under risk-based capital rules from $50 million to $500 million and a risk-based net worth requirement that exceeds 6%. The change, if adopted, would be effective until the current risk-based capital (RBC) rule goes into effect, currently set for Jan. 1, 2022. “The COVID-19 pandemic has created a vital need for financial institutions, including credit unions, to provide access to responsible credit and other member services to support consumers,” which the agency inferred would be facilitated by the proposal.
- Heard a report on its 2021 Annual Performance Plan, which essentially outlines the general direction of the agency for the coming year through its strategic goals of: Ensuring a safe and sound credit union system; providing a regulatory framework that is transparent, efficient and improves consumer access; and “maximizing organizational performance to enable mission success.”
LINKS:
Final Rule, Part 704, Corporate Credit Unions
Proposed Rule, Part 702, Risk-Based Net Worth, Complex Threshold
Proposed Rule, Part 712, Credit Union Service Organizations
NCUA’s 2021 Annual Performance Plan
(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. 11, 2020) As the month winds down, as well as the year, the NCUA Board apparently has decided to make the most of it — by scheduling not one but two meetings in the same week, one right after another on Thursday and Friday, including consideration of a final rule on subordinated debt.
Typically, the agency board meets once per month, and typically on the third Thursday of each month; two meetings in a month are rare. There will also (likely) be a new face at the meetings: Kyle S. Hauptman, confirmed by the Senate last week to a seat on the NCUA Board, will be available to join (after he is sworn into office).
The first meeting, on Thursday (getting underway at 10 a.m. ET and to be live streamed via the Internet), has six items on the agenda: five proposed and final rules, including a final rule on subordinated debt, and a board briefing on the 2021 normal operating level for the National Credit Union Share Insurance Fund (NCUSIF).
In January, the board unanimously issued a 275-plus page proposal to give some federally insured credit unions the ability to issue subordinated debt to help them meet their risk-based capital requirements. The proposal, issued for a 120-day comment period, would allow well-capitalized credit unions to count subordinated debt as capital for risk-based net worth purposes (the fundamental capital pool for mitigating credit union risk in their lending and investment portfolios).
Key provisions of the proposal included:
- 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.
- Addition of a new section addressing new rules and limits for making loans to other credit unions, including investing in subordinated debt at those credit unions.
NCUA has said that federally insured, state-chartered credit unions (FISCUs) would be eligible for applying to issue subordinated debt if their state laws and rules allow it.
NASCUS 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. Association leader Lucy Ito has noted that the risk-based capital rulemaking itself is intended to increase the capital buffer standing of a credit union before the share insurance fund, and that subordinated debt is consistent with that goal.
In July, NASCUS filed a comment letter in support of the proposal, writing 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.”
Also on the Thursday episode of the two-day schedule of meetings are consideration of:
- A temporary final rule on regulatory relief in response to COVID-19 (Part 701)
- A proposed rule on field of membership shared facility requirements (Part 701, Appendix B, of NCUA rules);
- A proposed rule on mortgage servicing rights (Parts 703 and 721);
- A proposed rule on overdraft policy (Part 701).
The board will also hear a briefing on the 2021 “normal operating level” (NOL) for the NCUSIF, which is the level of reserves to insured savings that the fund is required to operate under (within a range set by law) each year.