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Recently the National Credit Union Administration’s (NCUA) board approved a rule clearing the way for all credit unions to issue subordinated debt to investors and use the proceeds to meet regulatory capital requirements.
The new rules bring some additional things to consider before taking on subordinated debt, including:
Subordinated debt will be treated differently for credit unions based on their membership base and asset size.
Although the new rule will not take effect until Jan. 1, 2022, it has brought a renewed interest in secondary capital to the forefront.
Secondary capital is essentially an uninsured loan the issuing credit union is permitted to include as regulatory capital, which is taken in the form of subordinated debt. The secondary account holder’s claim must come after any other claims from shareholders, creditors and the National Credit Union Share Insurance Fund (NCUSIF).
However, not every credit union can obtain secondary capital. Today, only those considered a low-income designated credit union are able to obtain it with a proper plan approved by the NCUA.
Often, low-income credit unions would leverage issuing secondary capital as a strategic growth option to restore capital to a regulatory minimum, support future asset growth, enhance earnings or gain operational efficiencies.
During unique times, like those we are currently experiencing due to COVID-19, subordinated debt can be used to help bridge the gap as a result of increased deposits and lower capital.
Is your credit union considering leveraging subordinated debt? Contact Doeren Mayhew’s Financial Institutions Group members to complete a financial viability assessment to ensure it’s the right decision for your credit union.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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