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In response to the NCUA's request for comment on its proposal to allow low-income credit unions (LICUs), complex credit unions, and newly-formed credit unions to issue subordinated debt that operates as regulatory capital, NAFCU Wednesday expressed support for the proposal but urged the agency to reconsider the rule's complex procedural requirements that could discourage investors and issuers.

The issue of subordinated debt was included on the NCUA's fall rulemaking agenda and NAFCU has long advocated for a rule that would allow all credit unions to grow. Amid the coronavirus pandemic, the association called on the agency to fast-track this proposal and offer streamlined approval for secondary capital applications. 

In the letter, NAFCU Senior Counsel for Research and Policy Andrew Morris noted the use of subordinated debt offers credit unions "an additional source of capital to manage risk, achieve growth, and maintain liquidity during times of economic uncertainty."

"In good times, subordinated debt can help credit unions embrace organic asset growth without fear of diluting net worth—a problem that is magnified in the credit union industry due to heavy reliance on retained earnings," he added. "During economic downturns, subordinated debt can serve as a buffer against capital losses and strengthen the resilience of both individual credit unions and the National Credit Union Share Insurance Fund (NCUSIF), and accelerate recovery."

Morris shared recommendations from NAFCU and its member credit unions to "help ensure that potential issuers are not discouraged by the high cost of adopting inflexible, securities-based requirements for offerings or a potentially lengthy, open-ended review process."

"Removing these barriers will yield a proposal that is viable for all parties to subordinated debt transactions while preserving the safeguards that have contributed to the success of the NCUA’s secondary capital rule," wrote Morris.

The recommendations include:

• simplifying the process for issuing subordinated debt, modeling it after the existing framework for secondary capital;
• evaluating subordinated debt applications within a shorter, definite, timeframe;
• not arbitrarily limiting approved applications to a one year "use-by" date; and
• not prohibiting credit unions from behind both issuers and purchasers of subordinated debt.

Morris also shared the association's support for the rule, highlighting the core benefits of the proposal: Better options to guard against risk, a path to safely pursue growth, and regulatory capital flexibility that contributes to credit unions’ competitive viability.

Additionally, Morris urged the NCUA to consider other technical improvements and expressed general support for the proposed aggregate limits, with some modifications, on subordinated debt investments by credit unions.

More information on the NCUA's subordinated debt proposal can be found in NAFCU's Regulatory Alert.