NCUA Board Proposes Sub Debt and Combination Transaction Rules

The National Credit Union Administration (NCUA) Board on January 23 proposed a rule governing the issuance of subordinated debt by credit unions.

The rule would update the authority of low-income-designated credit unions to issue subordinated debt.

The proposed rule also would authorize complex credit unions subject to the agency’s risk-based capital requirements and new credit unions to use subordinated debt under certain circumstances.

The proposal will permit aspiring low-income credit unions and complex credit unions to issue subordinated debt.

The proposed rule will allow federal credit unions to borrow from any source.

The proposal will expand the eligible investors from institutional investors to accredited investors.

Plus, the proposed rule would incorporate enhanced investor protections.

This proposal will have a comment period of 120 days.

In addition, the NCUA Board proposed a rule providing greater clarity regarding the regulations governing transactions where a federally insured credit union proposes to assume liabilities from or merge with another institution that is not a credit union.

The proposed rule:

• simplifies the basic requirements that apply to combination transactions between a federally insured credit union and another type of financial institution;
• ensures that the directors of a federally insured credit union proposing such a transaction understand the nature and ramifications of the proposed transaction; and
• makes regulatory provisions applicable to all asset purchases and lists other NCUA regulations that apply to each particular transaction.

All such transactions will require the NCUA’s approval, and state-chartered, federally insured credit unions also must obtain approval from their state regulator.

NCUA estimates that there will be approximately 20 transactions per year.

Secondary Capital Up 10.5 Percent During the 1st Half of 2019

Low-income credit unions added secondary capital during the first six months of 2019.

Sixty-eight credit unions have $292.1 million in subordinated debt that counted as net worth at the end of June 2019.

This is up from $264.8 million at the end of 2018.

The following table shows the 10 credit unions holding the most secondary capital.

Six credit unions reported that more than half of their net worth was from secondary capital. At Hope FCU (Jackson, MS), 75.3 percent of its net worth was in the form of subordinated debt.

The other credit unions reporting that at least half of their new worth was from subordinated debt were:

• LCO FCU (WI), 69.4 percent;
• Hill District FCU (PA), 62.8 percent;
• Self-Help FCU (CA), 58.9 percent;
• Syracuse Cooperative FCU (NY), 57.8 percent; and
• Toledo Urban FCU (OH), 50.1 percent.

NCUA Board Proposes Delaying Risk-Based Capital Rule by Two-Years

The National Credit Union Administration Board on June 20th voted on a proposal to delay by two-years the implementation date of its risk-based capital rule until January 1, 2022.

Currently, the risk-based capital rule was scheduled to go into effect on January 1, 2020.

NCUA staff stated that the delay would not pose undue risk to the National Credit Union Share Insurance Fund.

Also, the delay would allow the NCUA Board to examine whether asset securitization should be accounted for by NCUA's capital standards; whether certain forms of subordinated debt should qualify as capital for risk-based capital purposes; and whether a community bank leverage ratio analog should be integrated into NCUA's capital standard.

NCUA Chairman Hood stated that he intends to bring forth a proposed rule allowing subordinated debt count towards a risk-based capital standard by the end of this year.

NCUA further stated that the delay would benefit credit unions by allowing them to allocate resources to implementing the Financial Accounting Standards Board current expected credit loss (CECL) standard.

Moreover, the time delay would allow NCUA to direct additional time and resources toward modernizing its examination systems.

Board member McWatters and Chairman Hood voted for the proposal.

Board member Harper dissented to delaying the risk-based capital rule and voted no on the proposal.

Read the proposed rule.