CU Trade Groups Like NCUA's Subordinated Debt Rule; Bankers Don’t

The NCUA’s proposed subordinated debt rule will allow credit unions to continue to grow, industry trade groups said Thursday.

But banking associations charged that the plan would further erode the responsibility that credit unions have to serve people of modest means.

The NCUA’s board on Thursday approved a proposed rule that would expand eligibility to issue Subordinated Debt to include non-low-income credit unions, complex credit unions and new credit unions.

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.

“NAFCU has long supported the ability for all credit unions to issue some form of alternative capital as this will provide them with increased flexibility to make loans in their local communities,” NAFCU EVP of Government Affairs and General Counsel Carrie Hunt said.

Hunt said the rule would provide credit unions with another tool in its toolbox and could help mitigate the impact of the NCUA’s Risk-Based Capital rule.

CUNA officials pointed out they told the agency last year that subordinated debt could benefit many credit unions and allow them to grow.

NASCUS President/CEO Lucy Ito agreed.

“NASCUS has long held that subordinated debt should be a tool for well-managed credit unions to meet risk-based capital requirements and as an additional line of defense to protect the National Share Insurance Fund,” she said.

She said she encourages the agency to work with state regulators as they craft a final rule.

Banking trade groups, on the other hand, said that final rule never should be issued.

“This proposal is yet another example of the NCUA pushing the envelope and expanding credit union powers well beyond limits justifying the industry’s tax exemption,” Rebeca Romero Rainey said.

She said the rule would undermine the mutual ownership structure of credit unions and allow outside investors to exploit the credit union tax subsidy.

Rob Nichols, president/CEO of the American Bankers Association, agreed.

“Allowing large credit unions to issue debt to outside, for-profit investors could misalign the incentives of credit union executives with their member owners, and potentially crowd out low-income credit unions’ ability to raise secondary capital,” he said.

Meanwhile, credit union trade groups also said they supported another proposal that clarified the NCUA rules governing the purchase of banks by credit unions.

NCUA Chairman Rodney Hood said the proposal did not add any new requirements, but merely clarified current rules.

“As the specter of bank branch closures continues to threaten communities across the country with the prospect of becoming a banking desert, we absolutely stand behind credit unions reaching out to ensure that these communities retain access to local financial services,” Elizabeth Eurgubian, CUNA deputy chief advocacy officer, said.

Hunt said such purchases are subject to strict regulations.

“When a credit union is approached by a selling bank seeking to merge, credit unions go through rigorous steps in order to make the best decision for their members and the local community,” she said.

Even after a purchase is approved, the credit unions must comply with other NCUA rules, including those specifying the institution’s field of membership, Hunt added.

Ito said that NCUA rules governing such purchases by federally-insured, state-chartered credit unions should focus on safety and soundness.

“For state-chartered credit unions, the NCUA’s authority should be limited to safety and soundness concerns and should not extend to governance questions, which are the purview of state regulators,” she said.

Banking trade groups said the NCUA plan should not make it easier for credit unions to purchase banks.

“While allowing large credit unions to issue outside capital is concerning enough, the NCUA also provided a roadmap for them to expand their federal tax subsidy by acquiring taxpaying community banks,” Nichols said.

“The growing trend of large credit unions using their taxpayer-funded subsidies to acquire smaller, tax-paying community banks worsens banking industry consolidation, reduces tax revenues for local communities, and furthers the credit union industry’s encroachment into full-service banking,” Rainey said.