Comments on the NCUA's Proposed Regulation on Subordinated Debt
In response to the NCUA's October 20 Letter to Credit Unions, CU Strategic Planning submitted the following comments:
October 27, 2021
Melane Conyers-Ausbrooks, Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428
Subject: Proposed Rule on Subordinated Debt, RIN 3133-AF38
Dear Ms. Ausbrooks:
CU Strategic Planning is pleased to take this opportunity to offer comments on the NCUA’s proposed regulation on subordinated debt.
CU Strategic Planning is a consultancy working with Low Income Designated and CDFI certified credit unions to develop comprehensive business plans, projections and compliance reports that support increasing service to low-to-moderate income populations, while safeguarding the NCUSIF and ensuring credit union safety and soundness. Our track record includes the development of 232 award-winning comprehensive business plans and related projections, submitted to the U.S. Treasury CDFI Fund as CDFI TA/FA, NACA, RRP and CDCI applications, resulting in Treasury's investment of $250,000,000 into 129 credit unions in 35 states. This investment was made primarily in the form of loan loss reserves and capital reserves, and in 2011 in the form of subordinated debt as secondary capital as part of Treasury’s previous CDCI program. It is with this historical understanding that we respectfully submit the following comments for consideration.
We are aware that the NCUA Board finalized its rule on subordinated debt in December 2020, and that you are now proposing to amend the definition of “grandfathered secondary capital” in a way that would encompass secondary capital issued to the United States Government or affiliated entities under applications approved before January 1, 2022, irrespective of the date of issuance. You have stated that “the proposed change would benefit eligible low-income credit unions (LICUs) that are either participating in the U.S. Department of the Treasury’s (Treasury) Emergency Capital Investment Program (ECIP) or other programs administered by the U.S. Government that can be used to fund secondary capital, if they do not receive the funds for such programs by December 31, 2021.” The NCUA had initially proposed to extend the expiration of regulatory capital treatment for these issuances to 20 years from the date of issuance or January 1, 2042, whichever date comes last.
First and foremost, CU Strategic Planning is supportive of the guidance announced by the NCUA in its October 20, 2021 Letter to Credit Unions that authorizes the acceptance of subordinated debt investments by eligible low-income credit unions from Treasury’s Emergency Capital Investment Program. This change from earlier proposed policy makes sense on two levels: 1) it recognizes the essential need for flexibility in planning for the capital needs of a subset of credit unions that need access to a greater variety of balance sheet tools, and 2) it aligns the timeframe (30 years) with what is being proposed by Treasury under its ECIP standards. There was no obvious reason for this inconsistency, and we are pleased that NCUA addressed it in this manner.
CU Strategic Planning recommends additional changes to the proposed regulation:
Allow membership capital deposits to be counted as equity.
When a credit union is formed, initial capital contributions (membership capital) represent an important initial stake, allowing the institution to begin doing business. Credit unions carry this capital on their books, but as non-stock entities, they are constrained in how they can deploy this capital. The NCUA should allow credit unions to count this type of capital as equity, similar to practices of other member-owned cooperatives. This is not only logical, as the capital’s ownership function would be preserved, but would also enable credit unions to more prudently and proactively use this additional capital to enhance member service offerings.
Classify non-member deposits as equity and not deposits (liabilities).
Low Income Designated credit unions can accept non-member deposits and secondary capital. Secondary capital enhances the credit union’s net worth and the non-member deposits do not. In most cases, non-member deposits are provided to the credit union to help support the lending activity needs of the low income communities. Typically, deposit from the low income members are not enough to support the credit union’s lending demands. Non-member deposits come from “community social investors”, non-profits and foundations that are aligned with the mission of the credit union and want to invest in their communities. Although needed, non-member deposits can decrease the net worth of a credit union. These investments should not be counted as deposits, but instead as equity and accounted for as an investment in the credit union’s mission.
Give all federally insured credit unions access to the benefits of secondary capital.
Finally, we strongly recommend that the NCUA continue its efforts to amend the Federal Credit Union Act to approve secondary capital for all federally insured credit unions, not just Low Income Designated ones. The benefit of increasing/strengthening the capital position of depository institutions is self-evident, and in the case of cooperative, member-owned not-for-profit credit unions, this would be a logical step that, if undertaken would make credit union balance sheets more durable and flexible, enhance taxpayer protections by supplementing the cushion between a credit union and potential losses to the National Credit Union Share Insurance Fund, and augment the ability of credit unions to serve the consumer finance marketplace. In short, a win-win-win. We are aware that this requires Congressional action, and we stand ready to assist you in this endeavor.
Again, we appreciate this opportunity to offer comments, and encourage you to contact us if you have any questions or suggestions.
Very truly yours,
Stacy S. Augustine, President/CEO