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ICBA called on the National Credit Union Administration to bar tax-exempt credit unions from using funds raised from Wall Street investors to finance acquisitions of tax-paying community banks.
Subordinated Debt Rule: In a letter to the NCUA, ICBA said the agency should curb the abuse of its subordinated debt rule, which allows credit unions to use their tax exemption to raise money from private equity firms to acquire community banks.
Rule’s Impact: ICBA said the NCUA rule:
Has led to an explosion of subordinated debt issuance by credit unions, rising from $540 million in the second quarter of 2021 to $3.65 billion in the second quarter of 2023.
Allows credit unions to sell ownership interests in their credit unions to nonmember investors, not their traditional member-owners.
Has contributed to a cottage industry of boutique investment banks and consultants supporting credit union acquisitions of tax-paying community banks.
Reform Proposals: To address the negative impact of the subordinated debt rule, ICBA called on the NCUA to prohibit:
Any credit union that issues subordinated debt from participating in a merger or acquisition for the next five years.
Any credit union from issuing subordinated debt for five years after completing the acquisition of a community bank.
ICBA Statement: In a national news release, ICBA said policymakers must step in to address perversions of increasingly antiquated federal policy. “The credit union tax exemption should not be for sale to the highest bidder on Wall Street,” ICBA President and CEO Rebeca Romero Rainey said.
More: ICBA has repeatedly called on Congress to investigate credit union acquisitions of tax-paying banks. Community bankers can use ICBA’s Be Heard grassroots action center to call on members of Congress to hold a hearing on credit union policy, while additional resources are available on the ICBA website.