As Prepared for Delivery on September 22, 2022
Thank you, Justin, and Tom.
For years, the NCUA has been considering how to create a regulatory environment where credit unions could utilize alternative forms of capital, such as secondary and supplemental capital and subordinated debt. Considerations progressed to the point where in December 2014 then NCUA Chair Debbie Matz created a working group on secondary capital for low-income credit unions. That move kicked off eight years of effort by the staff and board which culminated in the Subordinated Debt rule the Board passed in December 2020.
Then, Treasury’s Emergency Capital Investment Program (ECIP) fueled a great deal of work allowing credit unions to take full advantage of the program. Which leads us to where we are today.
Although much of today’s Notice of Proposed Rulemaking (NPR) deals with administrative and consistency issues, a few important points about sub debt bear repeating:
Subordinated Debt in a credit union is a security, not an equity. Great care went into this important point. The only authority under the FCU Act for FCUs to issue Sub Debt is the borrowing authority. As such, the issuances must be in the form of debt. Issuances under the Sub Debt rule meet the legal definition of a security. The OCC also recognizes Sub Debt as a security and requires offering documents. NCUA has taken the same approach and requires credit unions to prepare offering documents for issuance of Sub Debt.
Subordinated Debt is subordinate to all other claims against the issuing credit union, including those of members, other creditors, and the NCUSIF. Stated another way, those who buy Subordinated Debt get paid last in the event the credit union is liquidation.
Subordinated Debt is a powerful tool that can assist credit unions in bringing financial services to underserved communities. One of my priorities is chartering new credit unions. When I ask organizing groups for their biggest challenge, the overwhelming answer is ‘capital, capital, capital.’ I’m pleased to note that the rule allows new credit unions to use subordinated debt to meet capital requirements. And anything that makes it easier to start a new credit union is a step towards true financial inclusion.
Subordinated Debt allows Low Income Credit Unions (LICUs) to expand services in low-income communities. Credit unions are the original answer for serving the underserved and sub debt further supports that mission.
Treasury’s ECIP program was a major contributor to the significant increase in the dollar value of industrywide subordinated debt. A year ago, as of the second quarter of 2021, credit unions reported $533 million in subordinated debt. A year later credit unions reported subordinated debt totaling over $3 billion. I’d like to congratulate the staff for the work they did to allow credit unions to take advantage of that program.
While ECIP is temporary, the regulatory changes by the NCUA are ongoing. It remains to be seen if more complex credit unions will use subordinated debt to help finance growth while sustaining required capital levels. As I said before, subordinated debt is a powerful tool. With this great power comes great responsibility to use sub debt for the benefit of members and their communities.
I look forward to reading the comments on this NPR and to see the impact these regulatory changes will have on America’s underserved communities.
Mr. Chairman, that concludes my remarks. I have a question.