Open Doors To Capital With Subordinated Debt

Regulatory Capital Strategy

The NCUA’s upcoming final rule will relax the restrictions on credit unions’ eligibility to issue subordinated debt. Previously, the issuance of subordinated debt was restricted to low income designated credit unions. Subordinated debt can be treated as regulatory capital by the NCUA, giving more credit unions an alternative means of meeting capitalization requirements. Issuing subordinated debt may allow your credit union to grow faster than earnings alone would support.

Credit unions that anticipate a bank acquisition, credit union merger, or other event that affects capitalization may want to consider pre-emptively issuing subordinated debt to remain well-capitalized.

For low-income credit unions with assets less than $500 million, subordinated debt is treated as regulatory capital in the net worth ratio. For complex credit unions, subordinated debt is treated as regulatory capital in the risk-based capital ratio. For complex credit unions that are also low-income designated, subordinated debt is treated as regulatory capital for both the net worth and risk-based capital ratios.

For a detailed look at the new NCUA regulations, Washington, D.C.-based law firm Luse Gorman’s recent white paper provides an excellent foundation to begin planning your credit union’s strategy. For more information on these regulations or capital-raising transactions, please contact Luse Gorman partner and author of the white paper Jeff Cardone.


When the new rules go into force on January 1, 2022, the credit unions meeting at least one of the following requirements will be allowed to issue subordinated debt:

  • Complex credit unions with a capital classification of undercapitalized or greater.
  • Low-income designated credit unions
  • New credit unions with retained earnings equal or greater than 1% of assets.
  • Credit unions that anticipate becoming either a complex credit union with a capital classification of undercapitalized or greater or a low-income credit union within 24 months after issuance of subordinated debt notes.

Complex credit unions that are not low-income designated may not issue subordinated debt in excess of 100% of net worth.

Mergers & Acquisitions

Credit unions are not permitted to issue subordinated debt while holding investments in the subordinated debt of another credit union. If a credit union acquired subordinated debt investments in a merger, that credit union may still issue subordinated debt but may not increase investments in the subordinated debt of other credit unions.

Subordinated debt acquired by a merger with an issuing credit union or the assumption of an issuing credit union’s debt will only be treated as regulatory capital if the resulting credit union meets the eligibility requirements for issuing subordinated debt. If the resulting credit union does not meet these requirements, the following can occur:

  • The debt can be repaid by the resulting credit union.
  • The debt can be held but will not be considered regulatory capital.

Regulatory Considerations

Subordinated debt is permitted to be issued with maturities of 5 to 20 years. The amount treated as regulatory capital is reduced by 20% per year for debt with a remaining maturity of less than 5 years. The reduction follows the schedule below:

Remaining MaturityBalance treated as Regulatory Capital
4 to <5 years80%
3 to <4 years60%
2 to <3 years40%
1 to <2 years20%
<1 year0%
Capital Balance Schedule

An issuing credit union may only offer subordinated debt to accredited investors, either entities or natural persons.


All credit unions must be pre-approved to issue subordinated debt by the NCUA. The NCUA’s application and disclosure requiremments are detailed in the applicable final rule.