Complex Credit Unions Leverage Investor Capital to Fuel Growth Initiatives

The number of credit unions with more than $1 billion in assets continues to grow as the $2 trillion industry consolidates. Thanks to a National Credit Union Administration (NCUA) rule that went into effect at the beginning of 2022, credit unions with billions of dollars in assets can now use subordinated debt to fund strategic growth initiatives, including expansion into new markets and acquisitions of banks and other credit unions.   

 For an industry that is meant to be “member-owned,” this shift toward investor capital is startling.  

During the first quarter of 2022, credit unions’ outstanding subordinated debt surpassed $1 billion for the first time. According to S&P Global Market Intelligence, “credit unions added $159.0 million in subordinated debt” marking a 16.7% quarter over quarter and 127.1% year over year increase. 

Florida’s $12 billion VyStar Credit Union brought in an astounding $200 million in that three-month timeframe, “the largest single raise by a credit union yet.” In a statement to S&P Global Market Intelligence, VyStar President and CEO Brian Wolfburg said the credit union issued subordinated debt to support its growth.  

Notably, that growth strategy included the attempted acquisition of a $1.7 billion Georgia-based community bank, which was ultimately abandoned after it failed to receive requisite regulatory approval.  

And this is just the latest in a long line of similar expansion efforts by ultra-large credit unions with billions of dollars in assets. This explosion of investor capital in the credit union industry is the result of a legally questionable move by NCUA to authorize the use of subordinated debt by “complex credit unions” for regulatory capital purposes. 

Now, less than one year after the NCUA first authorized the use of subordinated debt by complex credit unions, they are already proposing to expand it. Specifically, the proposed rule would “extend the Regulatory Capital treatment for GSC,” (Grandfathered Secondary Capital) which “would benefit eligible low-income credit unions (LICUs) that are either participating in the U.S. Department of the Treasury’s Emergency Capital Investment Program or other programs administered by the U.S. Government.”  

Initially, the NCUA Board established a 20-year maturity for ECIP investments to ensure they were “squarely within [their] statutory authority when issuing notes.” Although “the Board continues to believe that a 20-year maturity is an appropriate demarcation point to ensure an FCU is issuing Subordinated Debt under its statutory authority,” lobbying from the credit union industry spurred further NCUA research that “provided grounds to offer additional flexibility in this area.”  

ECIP requires participating financial institutions to choose between 15- and 30-year repayment schedules for ECIP notes. By increasing the 20-year maturity for credit union subordinated debt to 30 years, NCUA has guaranteed that credit unions will not be subject to 15-year repayment schedules for ECIP borrowings. In other words, the agency responsible for regulating these credit unions is once again reinterpreting its statutory authority in order to maximize credit union growth, without regard for associated risks or congressionally mandated limitations. 

Subordinated debt increasingly resembles equity as the NCUA further delegitimizes the dubious decision to authorize these debt issuances by complex credit unions by extending the acceptable maturity date from 20 to 30 years. 

As the regulatory regime for credit unions becomes more relaxed, complex credit unions have become indistinguishable from community banks. Their ability to raise investor capital with 30-year horizons facilitates growth that goes well beyond credit unions’ original purpose.  

With neither meaningful field of membership restrictions nor mechanisms requiring them to demonstrate mission fulfillment and justify their tax exemption, Congress needs to reassess complex credit unions and determine whether they still differ from community banks. 

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