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The use of subordinated debt for supplementing a credit union’s regulatory capital ratio has been available to Low Income Credit Unions (LICUs) since the 1990s but was used lightly in the early years. At first, there was a general lack of understanding about sub-debt. It was only available to LICUs, capital levels were healthy enough without it, and it lacked regulatory emphasis or structure. However, the NCUA has more recently become more supportive of its use for capital management purposes as regulatory capital requirements have evolved in part due to credit unions coming under more capital pressure from the level of growth the industry has experienced.

As an example of the lack of understanding about sub-debt, years ago when I worked in the industry, I was able to qualify my credit union for its LICU designation. After obtaining the designation, I reviewed its advantages to the credit union with the board. When I mentioned the ability to issue subordinated debt to enhance regulatory capital, the initial reaction of the board was that it was somewhat incredulous that debt could qualify as regulatory capital and absorb losses similar to a credit union’s retained earnings.

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