Letter to NCUA on Subordinated Debt

Ms. Melane Conyers-Ausbrooks
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

Dear Madam:

The American Bankers Association (ABA) appreciates the opportunity to provide comments to the National Credit Union Administration (NCUA) on its proposed amendments (Proposal) to the Subordinated Debt Rule (Current Rule), which permits credit unions to issue subordinated debt for purposes of regulatory capital treatment.

As you know, the Proposal would replace the maximum maturity limit of 20 years for subordinated debt notes (Notes) with a requirement that credit unions seeking to issue notes with a maturity greater than 20 years demonstrate how the issuance can be characterized as debt as opposed to equity. In addition, the Proposal increases the maturity period by which Grandfathered Secondary Capital (GSC) may receive regulatory capital treatment from the Current Rule's 20 years to 30 years. Moreover, the Proposal includes four minor modifications to make the Current Rule "more user-friendly and flexible."

In previous comments to the NCUA, ABA requested the agency withdraw the Subordinated Debt Rule (now, the Current Rule).

ABA opposes the Current Rule and any amendments to further expand the ability for credit unions to issue subordinated debt for purposes of regulatory capital treatment from outside for-profit investors (such as hedge funds and private equity firms). Allowing credit unions to issue these notes is not authorized by any statutory language, encroaches on "bank-like" activity, and threatens the safety and soundness of credit unions.

I. The Proposal is not authorized by any statutory language.

Allowing credit unions to issue subordinated debt would undermine the chartered mission of the Federal Credit Union Act, which states that credit unions serve people of modest means. It should also be noted that only Congress has the authority to permit the issuance of these notes to satisfy credit union capital requirements. Congress amended Section 216 of the Federal Credit Union Act, enabling Low-Income Credit Unions (LICUs) to include subordinated debt as part of their capital requirements for the net worth requirement. Notably, the provision does not allow credit unions to issue subordinated debt for any other purpose. In the Current Rule, the NCUA instead cited the borrowing authority of credit unions granted in Section 107(9) of the Federal Credit Union Act as its basis. However, the provision does not authorize the issuance of these notes for capital purposes.

II. The Proposal encroaches on "bank-like" activity.

The Current Rule and the Proposal, which provides more flexibility for credit unions to issue debt notes, encroaches on bank-like activity, further calling in to question the reasoning behind credit unions' federal income tax exemption. The basis for the tax-exempt status stems from credit unions' non-profit cooperative ownership and prohibition on issuing capital stock. However, gaining access to funding other than through retained earnings inherently has "stock-like" features. The Current Rule allows subordinated debt to be treated as regulatory capital, potentially undermining the prohibition on capital stock issuance. Aiming to align the regulatory treatment of 30-year subordinated debt instruments under the Emergency Capital Investment Program (ECIP) and FCUs' issuance of subordinated debt, the NCUA proposes to eliminate the maximum maturity date of the latter. Even though the agency admits in the proposed rulemaking that a "20-year maturity is an advantageous demarcation point to ensure a FCU is issuing Subordinated Debt under its statutory authority", the NCUA nevertheless proposes to provide additional flexibility to FCUs by eliminating the maximum maturity date. ABA believes this is unreasonable as the ECIP has not modified NCUA's statutory authority. Additionally, by extending their maximum maturity, these instruments become more like "equity-like." Even by the NCUA's own admission, the fixed stated maturity is a factor in determining whether an instrument may be considered debt or equity with a general rule being that the shorter the maturity date, the more the instrument resembles debt.

III. The Proposal threatens the safety and soundness of credit unions.

ABA is also concerned that the Current Rule and the proposed amendments do not establish reasonable limits on either the allowable amount of subordinated debt that can be issued or use of funds generated from the issuance of notes. The lack of safeguards could potentially lead to the rapid growth of credit unions and threaten the very safety and soundness of these institutions. Banking regulators, through Basel III, have limited the amount of subordinated debt that can be considered capital for meeting capital requirements and stipulated that subordinated debt can only satisfy Tier 2 Capital. However, the NCUA's Current Rule does not apply comparable standards, potentially enabling credit unions to dangerously utilize high levels of subordinated debt to satisfy capital requirements. In addition, the Current Rule does not stipulate how funds from subordinated debt may be used, encouraging the continuation of the trend of credit unions acquiring banks and credit unions. As we recommended before the Current Rule was finalized, the NCUA should limit the use of these funds.

In conclusion, the ABA opposes the NCUA's Proposal further enabling credit unions to issue subordinated debt for purposes of regulatory capital treatment and the Current Rule. The issuance of these notes for the beforementioned reasons is not permissible under the Federal Credit Union Act, inappropriately mirrors bank-like activity, and threatens the safety and soundness of the credit union industry.

Sincerely,

David Androphy
Senior Manager, Prudential Regulation & Asset Management
American Bankers Association