January 13, 2021

NAFCU breaks down subordinated debt rule, impact on CUs in Final Reg

regIn a Final Regulation Alert sent to members Tuesday, NAFCU summarized the NCUA's recently issued rule permitting low-income designated credit unions (LICUs), complex credit unions, and new credit unions to issue subordinated debt for purposes of regulatory capital treatment. NAFCU has long advocated for a subordinated debt rule that would allow all credit unions to grow.

The association generally supported the proposed rule and some of the NAFCU-sought changes were made in the final version; however, the final rule does not adopt more simplified procedural requirements for the application and offering process. 

In the Final Regulation, which also discusses how the final rule impacts credit unions, NAFCU Senior Counsel for Research and Policy Andrew Morris highlights:

  • as a form of regulatory capital, subordinated debt will contribute to a complex credit union’s risk-based capital ratio under the risk-based capital (RBC) rule, but not the statutory net worth ratio;
  • LICUs will be able to issue subordinated debt that contributes to net worth—similar to their current authority for secondary capital;
  • in general, the final rule mirrors the contents of the NCUA’s January 2020 proposal; however, the NCUA has made several minor changes; and
  • although the NCUA has no current plan to charge subordinated debt application fees, the final rule clarifies that the NCUA Board will publish a fee schedule only if it makes a determination to charge a fee.

Of note, the NCUA is expected to consider a final rule on corporate credit unions during its board meeting this week, which is related to the subordinated debt rule and previous rule on corporate credit unions.

For more on the NCUA's final rule, including a section-by-section analysis, read the Final Regulation. The rule will take effect Jan. 1, 2022.

NAFCU will continue to work to ensure that this rule does not increase regulatory burdens as it provides increased access to capital for credit unions.