For-Profit Investors Take Note: Non-Profit Credit Unions are Ready to Borrow

To borrow from the great line purportedly uttered by late Sen. Everett Dirksen about spending in Washington – “a billion here, a billion there, and pretty soon you’re talking about real money” – credit unions are taking huge advantage of their regulator’s relaxed position on the highly profitable not-for-profits by raising hundreds of millions of dollars a quarter from hedge funds and other for-profit investors in the form of subordinated debt.

Market Intelligence reported recently that credit unions are expected to have a “record year” in 2022 gathering subordinated debt on the heels of a fourth quarter last year that saw CUs make an eye-popping almost $380 million.

Noting the nearly $1 trillion in outside capital that now backs “not-for-profit” credit unions, Market Intelligence detailed the industry’s stunning cash grab:

“Total outstanding uninsured secondary capital levels for U.S. credit unions stood at $947.5 million in the fourth quarter of 2021, up 66.7% from $568.5 million in the linked quarter and 106.3% from $459.2 million in the year-ago period. Increasing interest among credit unions as they look to grow, [and] recent regulatory rule changes that expand the number of institutions able to access secondary capital … are setting 2022 up to be a record year for credit union subordinated debt levels, market participants said.”

Industry observers, Market Intelligence reports, believe that rules changes made by NCUA, the industry’s primary regulator, make it easier for so-called “complex credit unions” with $500 million or more in assets to raise capital in the markets.

From Reform Credit Unions’ perspective, this unbridled growth by not-for-profit credit unions is just another example of the industry’s largest players taking gross advantage of their tax-exempt status. Using the newfound subordinated debt to fuel growth – including buying banks at an increasingly frenetic pace – runs counter to the mission and purpose of credit unions.

Indeed, Market Intelligence goes onto report:

“Credit unions must pay cash for banks because they do not have stock to issue, so secondary capital can serve as a tool to boost their capital ratios in the event of a bank acquisition, Christensen said.

“Of the top 10 credit unions with the most outstanding subordinated debt as of Dec. 31, 2021, three have announced at least one bank purchase in the past eight months. Green State CU, which had the second-most total outstanding secondary capital at Dec. 31, 2021, announced three bank purchases in 2021.”

Three bank purchases by a single credit union in one calendar year seems like something Congress should be looking into and asking serious questions about. We urge lawmakers to stop turning a blind eye to the greed of large credit unions. In fact, at Reform Credit Unions, we believe the time has come for lawmakers to open their eyes to large credit unions and how they are gaming a system rigged unfairly in their favor.

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