As Prepared for Delivery on September 22, 2022
Thank you very much, Justin and Tom, for your presentation of this proposed rule to change the maturity requirements for subordinated debt notes and grandfathered secondary capital under the NCUA’s current subordinated debt rule.1 I wholeheartedly support these proposed changes because they would advance the statutory mission of federally insured credit unions to meet the credit and savings needs of their members, especially those of modest means.
The pandemic-induced recession hit communities of color and the poorest households the hardest. High inflation rates have also created new economic challenges for these families. With the Emergency Capital Investment Program — otherwise known as ECIP — Congress created a lifeline to support these underserved communities, and to assist them in recovering from the pandemic in the short term and in achieving financial stability in the long term. Through ECIP, participating minority depository institutions and community development financial institutions are receiving patient, long-term capital that will become a game changer to advance greater financial inclusion and economic opportunity.
Minority depository institutions and community development financial institutions are often the only insured depositories operating in rural areas, communities of color, and other underserved places. Participating credit unions will leverage ECIP funds to lend in these areas to start small businesses, back eligible community development projects, and offer car and home loans. And, over time, the impact of these funds will grow exponentially as members pay back those initial loans with interest and the participating credit unions make new ones.
The U.S. Department of the Treasury’s ECIP grant funds can be held up to 30 years, but the NCUA’s current subordinated debt rule generally limits maturity levels to 20 years. To fix this maturity mismatch, this proposed rule would align the NCUA’s subordinated debt rule with the Treasury Department’s ECIP rule. That is good for credit union members, their credit unions, and their communities.
Specifically, this proposal has three components. First, it would replace the maximum maturity of subordinated debt notes with a requirement that any credit union seeking to issue such notes with maturities longer than 20 years demonstrate how these instruments would continue to be considered “debt” beyond 20 years. Second, this proposed rule would extend the regulatory capital treatment of grandfathered secondary capital to the later of 30 years from the date of issuance or January 1, 2052. This change is especially important for ECIP to work as Congress intended. And third, to provide more flexibility, this proposed rule would make four other minor modifications to the current subordinated debt rule.
With that, I do have two questions. For a credit union wanting to avail itself of a 30-year maturity for subordinated debt, what would that credit union have to demonstrate to show how such instruments would continue to be considered “debt” over the longer term? Tom or Justin, would you provide more clarity here?
Thank you for those insights. Lastly, what are the benefits of the NCUA changing its rules so that credit unions participating in ECIP can have 10 additional years of capital? In other words, can you help us to quantify the multiplier effect of the more than $2 billion that will flow into the credit union system?
Thank you again, Tom and Justin, and thank you to your teams. That concludes my remarks. I now recognize Vice Chairman Hauptman.
1 The Board finalized the current subordinated debt rule in December 2020 with an effective date of January 1, 2022.