Alternative Capital Proposal Advances, Incorporating NWCUA Input

NCUA Board votes unanimously to advance proposal allowing non-low-income-designated credit unions to access alternative capital through issuing of subordinated debt.

2/4/2020

Message received! That was the key take away from the National Credit Union Administration Board as it voted unanimously to advance a proposal to allow non-LIDCU credit unions to access alternative capital through the issuing of subordinated debt.

The proposal has been years in the making and welcome news to Northwest Credit Union Association member credit unions, which advocated for this update to the credit union toolkit. More information may be found here.

“Supplemental capital is a valuable tool that can assist well-managed, well-capitalized, and profitable institutions in their efforts to support prudent growth while permitting larger institutions to continue to serve as a source of strength for the insurance fund without prejudice to the interests of core membership,” said Greg Mitchell, President and CEO of First Tech Federal Credit Union.

Mike Ryan, SVP and General Counsel of BECU, echoed that sentiment.

“BECU is pleased to see the NCUA take the next rulemaking step in allowing credit unions the authority to use subordinated debt as a form of alternative capital,” Ryan said.

The Association has been active in moving this rule forward. The proposal includes a number of key elements advocated by our members in a letter sent to the board early in the process.

The proposal expands eligibility to issue subordinated debt to include non-LIDCU complex credit unions, credit unions that anticipate being a low-income-designated or designated as a “Complex Credit Union” within 24 months, and non-LIDCU new credit unions.

The agency agreed with NWCUA and has included expanding eligible investors for subordinated debt from institutional investors to accredited investors/natural persons. The proposal also significantly increases maturity lengths, another NWCUA priority.

These changes can have a positive impact on credit unions of all sizes.

“Secondary capital is a useful tool for Point West as it provides liquidity during periods of significant growth and change,” said Amy Nelson, CEO of the Portland-based credit union.

Flexibility has also been enhanced in the proposal by allowing credit unions to retain subordinated debt through a merger or dissolution. Additionally, flexibility has been given to repayment amounts.

Credit unions will also have flexibility for multiple issuances without reapplying.

“Secondary capital has proven to be a valuable tool at CapEd to help us continue to lend when we were maxed out in certain lending buckets,” said Todd Erickson, President and CEO of the Meridian, Idaho-based credit union.

The NCUA proposal allows qualifying non-LIDCUs to utilize subordinate debt to meet risk-based capital requirements. However, it prevents credit unions from both issuing and receiving subordinated debt to skew their capital position.

The proposal also carefully protects the member-owned structure by ensuring any subordinated debt issuance does not imply any form of equity position in the credit union.

Equally important to both the NCUA and member institutions, the proposal adds safeguards for the Share Insurance Fund.

BECU’s Ryan emphasized the importance of these provisions.

“This would pave the way for credit unions of all sizes to enhance member services and support strategic growth plans, while ensuring resiliency against economic downturns. Additional capital strengthens the credit union system and enhances safety and soundness by providing an additional buffer to protect the National Credit Union Share Insurance Fund,” he said.

Recognizing the complexity of the issue, the NCUA has provided a 120-day comment period to allow stakeholders enhanced opportunity to review the proposal and add constructive comments.

John Trull, NWCUA VP of Regulatory Affairs, invites members to share their observations and concerns.

“Our Regulatory Advisory Subcommittee will review the proposal and develop a response, as well as  coordinated  guidance for members who wish to comment individually on the proposal,” Trull added.