ABA Comment on Subordinated Debt Submitted to NCUA

Mr. Gerard Poliquin
Secretary of the Board
National Credit Union Administration
1775 Duke Street,
Alexandria, Virginia 22314-3428

Dear Mr. Poliquin:

This letter is submitted on behalf of the American Bankers Association (ABA), in response to the National Credit Union Administration’s (NCUA) request for comment on a proposed rule (Proposed Rule) to permit credit unions to issue subordinated debt for purposes of regulatory capital treatment.

The Proposed Rule would permit: a Low-Income Credit Union (LICU) to include subordinated debt in its risk-based capital (RBC) ratio as well as its net worth requirement; a Complex Credit Union that is not a LICU to include subordinated debt in its RBC ratio; and a New Credit union that is not a LICU to use subordinated debt to comply with NCUA’s prompt corrective action regulations. Moreover, NCUA is proposing to extend the eligibility to issue subordinated debt to credit unions that anticipate being designated as a LICU or Non-LICU Complex Credit Union within 24 months following their planned issuance of the debt.

I. Executive Summary

ABA requests that the NCUA withdraw the Proposed Rule. As an independent federal agency, NCUA is prohibited from taking actions that are arbitrary and capricious.3 In applying this standard of review, federal courts will not substitute their judgment for that of an agency. However, an agency’s actions must be based upon an examination of relevant data and the agency must articulate a satisfactory explanation for the action.5 For the reasons given below, the Proposed Rule does not meet these standards, especially as it relates to non-low income credit unions.

The Proposed Rule lacks a reasonable basis.

The stated purpose of the Proposed Rule is to permit credit unions to issue subordinated debt for purposes of regulatory capital treatment. However, over 98 percent of all credit unions
currently meet the NCUA’s net worth requirement, and over 98 percent of Complex Credit Unions meet the NCUA’s RBC rule. Thus, there is no reasonable purpose for the Proposed Rule.

The Proposed Rule jeopardizes the safety and soundness of credit unions.

The Proposed Rule does not establish reasonable limits on the amount of subordinated debt a credit union may issue or include any prescribed limit on the use of the funds generated from the issuance of the debt. These deficiencies in the Proposed Rule will foster dangerous rapid growth by credit unions and will generate systemic risk by increasing connections between credit unions that issue subordinated debt. In addition, the proposed rule raises complex securities law issues that will create significant safety and soundness, and compliance issues that credit unions and their regulator may be ill-equipped to manage.

The Proposed Rule is not authorized by the terms of the Federal Credit Union Act and usurps Congressional authority.

The Proposed Rule is based upon a provision in the Federal Credit Union Act that authorizes federal credit unions to borrow funds. That provision of the Federal Credit Union Act does not authorize the issuance of debt for capital purposes. The capital rules applicable to credit unions are controlled by a separate provision in the Federal Credit Union Act. A bill to permit credit unions to issue subordinated debt was introduced in Congress several years ago, but that bill was not acted upon.

The Proposed Rule makes credit unions more “bank-like” and should result in them losing their tax exemption.

The Proposed Rule requires the subordinated debt to have capital-like features, and this negates the basis for the tax-exempt status of state-chartered credit unions, which is founded on a prohibition on issuing capital stock. Moreover, some have cited credit union cooperative ownership, among other things, as the basis for the current federal income tax exemption. The introduction of outside investment into complex credit unions, e.g., hedge funds, and counting such investments as “capital” and thus akin to ownership for purposes of the tax policy discussion, likewise raises the question whether such federally-chartered complex credit unions should continue to be entitled to such an exemption.

Download the comment letter to read the full text.