NCUA Board to Tackle Subordinated Debt, Bank Purchases on Jan. 23

The latest chapters in the fight between the NCUA and the banking industry are likely to be written on Jan. 23, when the agency board considers two contentious proposed rules – one on subordinated debt and one on credit union-bank mergers.

The board is also scheduled to discuss the credit union interest rate ceiling, which is now capped at 18% for most loans. The board has been under pressure from the credit union industry to increase it or explore a floating interest rate.

As always, the details of the proposed rules were not released when the agency made public the agenda for its meeting. NCUA Chairman Rodney Hood had promised the proposed rules on bank mergers and subordinated debt would be issued by the end of last year, but they were delayed.

Credit unions have long pushed for subordinated debt rules, while the banking industry has argued that credit unions should not be permitted to have alternative types of capital.

And the banking industry – and some Republican members of Congress – have raised questions about recent credit union-bank mergers.

The NCUA board last year once again delayed the agency’s Risk-Based Capital rule, as Hood said he wanted to consider the entire capital issue, including subordinated debt.

As far back as 2002, James Wilcox, a professor at the University of California at Berkeley’s Haas School of Business, advocated in favor of subordinated debt in research at the Filene Research Institute.

“Subordinated debt can simultaneously benefit public policy and credit unions,” he wrote. “Credit union regulators could benefit from both the direct and indirect effects afforded by subordinated debt.”

Later at a Filene meeting he discussed the risk associated with subordinated debt.

“Subordinated debt is also unsecured,” he said. “It cannot be backed up by a line of credit or some kind of insurance. It can’t be credit enhanced. It must be actual capital at risk.”

In his blog on Friday, Henry Meier, SVP and general counsel for the New York Credit Union Association, previewed the upcoming fight.

“Depending on what NCUA comes out with, the regulation could give credit unions of all sizes the ability to obtain additional capital and set off a fierce attack by the bankers,” he wrote Friday in his blog, which he emphasized is his own opinion and not that of the association he represents.

NASCUS President/CEO Lucy Ito said she applauded the NCUA board for tackling the subordinated debt issue.

“We are pleased that [the] NCUA is moving forward on this important issue,” she said. “NASCUS has long been a proponent of subordinated debt as a tool for well-managed credit unions to meet capital requirements and to add another line of defense to protect the National Credit Union Share Insurance Fund.”

Ito said given the complexity of the issue, the board should allow an extended comment period on the proposed rule.

On the other hand, the Independent Community Bankers of America condemned the board for considering it, reiterating its 2017 position that alternative capital “would put the financial system and taxpayers at increased risk merely to expand the activities of credit unions beyond the limits justified by their tax exemption.”

Again, it is unclear what the bank purchase rule is likely to say, but the ICBA has based much of its anti-credit union “Wake Up” campaign on the threat such deals pose.

Last year, at a House Financial Services Committee meeting, Rep. Blaine Luetkemeyer (R-Mo.) raised the issue with banking regulators. Hood responded that the deals represented the free marketplace at work. But FDIC Chairwoman Jelena McWilliams said the playing field may not be level since credit unions are tax exempt and are not subject to the Community Reinvestment Act.

Also at its Jan. 23 meeting, the NCUA board will review its 2020 performance plan and receive a briefing on civil monetary penalty inflation increases required by law.