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NCUA's capital proposal could irk banks and credit unions alike

Get ready for fireworks.

The National Credit Union Administration board plans to address two hot-button issues at its regular monthly meeting Thursday: bank acquisitions and subordinated debt.

The NCUA won’t release details of any proposed rules until Thursday morning, but both issues are already pain points for banks.

An effort to sketch out ground rules for buying banks comes amid an uptick in the number of such deals, along with an increase in bankers’ frustration.

Credit unions agreed to buy 16 banks last year, easily surpassing the 2018 total. Earlier this month, though, Colorado banking regulators blocked a bid by Elevations Credit Union in Boulder to buy the assets of the $115 million-asset Cache Bank and Trust in Greeley.

Banker opposition to credit unions’ use of alternative capital is more deep-seated.

The NCUA published an advance notice of proposed rulemaking on alternative capital in January 2017. The document, which identified subordinated debt as the only acceptable form of alternative capital for the industry, generated hundreds of comment letters, including highly critical responses from the American Bankers Association and Independent Community Bankers of America.

Interestingly, Geoff Bacino, a former NCUA board member and partner at Bacino & Associates, an Alexandria, Va., consulting firm, is predicting credit unions may be disappointed with what the NCUA unveils. In a newsletter article Wednesday, Bacino suggested that “limitations and requirements in the proposal may serve to severely reduce the number of credit unions eligible to use subordinated debt.”

Currently, only credit unions with a low-income designation are eligible to use subordinated debt as a capital tool. There were just over 2,600 credit unions with a low-income classification at the end of the third quarter, the most recent data available, constituting about half of all federally insured credit unions.

The NCUA has pledged to put some type of capital option in place for credit unions impacted by its planned risk-based capital rule. The board voted last month to delay the start of that rule until January 2022.

Even if the board puts forth a subordinated debt proposal with significant limitations, bankers are unlikely to be satisfied, said Keith Leggett, a retired American Bankers Association economist who regularly blogs about credit unions.

“They view it as the camel’s nose under the tent,” Leggett said. Bankers fear a successful experience with subordinated debt by even a handful of large institutions could give the credit union industry ammunition to make a case for wider usage and perhaps even counting debt as Tier 1 capital for regulatory purposes.

Officials at the American Bankers Association expressed skepticism that a proposed subordinated debt rule would be limited, adding that any access to alternative capital would serve to spur growth at the expense of other financial institutions.

“The reality is money is fungible and can be used for a variety of purposes,” said Ken Clayton, who heads the ABA’s Office of Legislative Counsel and Policy Integration. “The devil is in the details, but this proposal could harm not just community banks, but small credit unions and the communities they both serve.”

While low-income-designated credit unions do have authority to count their secondary capital as Tier 1 capital, only a relative handful of institutions have made use of the opportunity. Through Sept. 30, the amount of secondary capital on the books of low-income-designated credit unions totaled $290 million, according to the NCUA. That’s up from $260 million at the end of 2018 but still a tiny sliver — just 0.16% — of the industry’s $175 billion net worth.

At least one credit union trade group has given cautious approval to the NCUA’s decision to address subordinated debt.

The National Association of State Credit Union Supervisors “has long been a proponent of subordinated debt as a tool for well-managed credit unions to meet capital requirements and to add another line of defense to protect the National Credit Union Share Insurance Fund,” President and CEO Lucy Ito said last week in a statement. Ito said she would like to see the NCUA provide a longer-than-usual 120-day comment period for the rule.

“Such a complex and critical rule deserves due deliberation,” Ito said.

The NCUA also plans to consider an inflation adjustment to its schedule of civil money penalties during Thursday’s meeting, as well as the interest rate ceiling on loans for federal credit unions.

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