Subordinated debt proposal would help meet CU liquidity needs

July 2, 2020

CUNA generally supports NCUA’s proposal on subordinated debt but offered several suggestions to improve the rule in its comment letter to the agency sent Thursday. The proposal would permit low-income designated credit unions, complex credit unions and new credit unions to issue subordinated debt for purposes of regulatory capital treatment, including for purposes of complying with the NCUA’s new risk-based capital requirement.

CUNA is a longtime supporter of access to alternative forms of capital, particularly since the 2008 Financial Crisis, which “demonstrated the need for and showed how credit unions would use alternative capital,” the letter reads.

“Our members have mentioned the importance of alternative capital as another source of capital for various liquidity needs, giving credit unions flexibility for their day to day operations as they grow and become more sophisticated,” the letter reads. “Regardless of how a credit union utilizes alternative capital, our members have consistently emphasized that a chief lesson from the Financial Crisis is that capital is king. While credit unions as a whole remain well capitalized, credit unions are the only financial institutions with no ability to raise capital other than through retained earnings. 

“However, the [subordinated debt proposal] would go a long way toward allowing credit unions to raise additional capital and thereby minimize any risk to the NCUSIF,” it adds.

CUNA focuses on NCUA’s authority to issue such a rule under the Federal Credit Union Act.

“The reason to move forward with a rule is as simple as the fact that the FCUA gives the NCUA Board authority to authorize this rule and credit unions have a need, as do all financial institutions, for alternative forms of capital,” the letter reads.

Among other things, allowable subordinated debt under the proposal would:

  • Have a maturity of at least five years and not more than 20 years from issuance; 
  • Be subordinate to all other claims in liquidation and have the same payout priority as all other outstanding subordinate debt and grandfathered secondary capital; 
  • Be unsecured; and 
  • Be available each fiscal year to cover any deficit in retained earnings on a pro rata basis among all holders of the subordinated debt and grandfathered secondary capital.