With the National Credit Union Administration meeting today on a rule to relax restrictions on issuing subordinated debt, a former NCUA official raised concerns in a recent blog post.
Background: The NCUA rule would allow credit unions to issue subordinated debt notes with maturities of longer than 20 years. The agency has said it is raising the maturity limit, which currently ranges from five to 20 years, to enable credit unions to participate in the Emergency Capital Investment Program, under which Treasury purchases subordinated debt in 15- or 30-year maturities.
New Blog Post: In a blog post this week, Callahan & Associates co-founder and former NCUA Central Liquidity Fund President Chip Filson said a key question is how much detail credit unions will be required to provide the board and public about how they source and use the funds they raise, because the interest on the debt is an operating expense that comes before member dividends. He noted that bank purchases have been an important part of some credit unions’ use of debt.
ICBA Opposition: ICBA expressed opposition to the rule in a December comment letter, noting the changes are inappropriate because they are not tailored to ECIP participation. ICBA also said the proposal increases the likelihood of credit unions selling securities that courts hold to be impermissible equity interests.
ICBA Recommendations: Instead, ICBA encouraged the NCUA to:
Issue regulations barring credit unions from using proceeds from the issuance of subordinated debt to purchase the assets of FDIC-insured banks.
Continue to limit the maturity of credit union subordinated debt to 20 years, or only permit longer maturities when the creditor is the U.S. government.
Require credit unions to submit written opinions from a qualified counsel and li
