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Credit unions' new capital proposal could increase bank purchases

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A new proposal from the National Credit Union Administration board would give large credit unions the ability to issue subordinated debt and apply it to their risk-based capital requirement.

The plan, long in the works, received unanimous approval from the NCUA board Thursday during the regulator’s monthly open board meeting in Alexandria, Va.

The proposal will now go out for a 120-day comment period, double the usual length.

NCUA’s proposed subordinated debt rule unquestionably represents the most significant change to credit unions’ capital regulations in more than a decade and maybe the most important since 1998, when low-income designated credit unions were permitted to include secondary capital as part of their net worth calculations.

The proposed rule would also expand the pool of potential investors by permitting accredited investors to purchase credit union subordinated debt, in addition to traditional institutional investors.

As things stand now, only a relative handful of the more than 2,600 low-income-designated credit unions have taken advantage of their subordinated-debt authority. At June 30, just 68 had debt on their books totaling just under $300 million, according to NCUA.

Thursday’s board action would extend subordinated-debt authority to 285 additional credit unions, most of them large institutions that hold the lion’s share — $730 billion — of the industry’s total assets.

As recently as 2009 the total amount of credit union subordinated debt amounted to less than $100 million, though in recent years applications have grown larger and more complex, Tom Fay, capital markets manager for the agency’s Office of Examination and Insurance, said Thursday.

Under the new rule, NCUA expects to receive 20 to 40 applications per year, with the majority coming from complex credit unions. To keep pace with an increased debt-related workload, it would need to increase its annual legal budget $1 million, Fay added.

Trouble brewing?

Commenting on a different agenda item, board member J. Mark McWatters said Thursday that the “Hatfields-and-McCoys carping between credit unions and community banks has grown tiresome.” A plan to allow the industry’s largest institutions access subordinated debt is unlikely to produce a calming effect.

Fay acknowledged that no specific provision in the proposed rule would prevent credit unions from leveraging subordinated debt to acquire a bank. “We don’t mandate the strategic intent of what a credit union does with that capital,” he said.

The fact that didn’t escape notice of American Bankers Association President and CEO Rob Nichols.

“Given that we have already seen a wave of these acquisitions over the last few years, now is not the time for the NCUA to create additional tools to encourage more,” he said in a statement.

“Allowing large credit unions to issue debt to outside, for-profit investors could misalign the incentives of credit union executives with their member owners, and potentially crowd out low-income credit unions’ ability to raise secondary capital,” Nichols added.

Independent Community Bankers of America President and CEO Rebecca Romero Rainey was even more pointed in her comments.

“We urge the agency to withdraw its plan,” Romero Rainey said Thursday in a statement. “This proposal is yet another example of the NCUA pushing the envelope and expanding credit union powers well beyond limits justifying the industry’s tax exemption.”

No new regs for bank purchases

According to NCUA, credit unions have acquired 18 financial institutions since the start of 2018 with another 9 deals currently pending. While the number remains small in absolute terms, the upward trend prompted the agency to embark on a revision of its rules governing combinations with non-credit unions.

It unveiled a proposed regulation Thursday aimed at making the existing framework simpler and more transparent, rather than imposing new regulatory requirements.

“It provides some much-needed clarity without imposing an undue regulatory burden,” NCUA Chairman Rodney Hood said.

Hood linked the uptick in bank acquisitions by credit unions to “evolution in the marketplace,” saying such deals can benefit consumers in underserved and rural areas. Indeed, banker frustration notwithstanding, the board appears content with taking a largely hands-off approach to the issue.

“If, on occasion, market forces and arms-length negotiations indicates that [a] merger…between a credit union and a community bank makes economic sense, the proposed rules will assist both parties in negotiating, documenting and closing their transaction in a fully accountable and transparent manner,” McWatters said.

The board on Thursday also completed a number of housekeeping matters, including extending the current 18% interest rate cap on loans for federal credit unions to September 2021 and confirmed required inflationary adjustments for civil monetary penalties.

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