As Prepared for Delivery on March 16, 2023
Thank you, Mr. Chairman, and thank you, Justin and Tom, for your presentation.
I want to begin my remarks by stating that I will enthusiastically be supporting today’s final rule. I would also be remiss if I didn’t thank Chairman Harper and Vice Chairman Hauptman for their work in bringing the final sub-debt rule forward several years ago.
The current sub-debt rule restricts the maturity of subordinated debt notes to a minimum of 5 years and a maximum of 20 years. The subordinated debt rule further caps the regulatory capital treatment of grandfathered secondary capital at 20 years. Under the ECIP, the Treasury allowed 30-year subordinated debt instruments. While supervisory guidance from the Office of Examination and Insurance and a rule finalized by this Board in December of 2021 facilitated LICU participation in the ECIP, the agency recognized that there is a distinct mismatch between a 30-year ECIP subordinated debt instrument and the 20-year maximum regulatory capital treatment under our regulations. To address this discrepancy, the Board is bringing forward today’s final rule.
In addition, in today’s rule, the Board also recognizes that a fixed stated maturity date is but one factor in a debt versus equity analysis and, as noted by the U.S. Supreme Court, “[t]here is no one characteristic…which can be said to be decisive in the determination of whether obligations are risk investments in the corporations or debt.” Let me repeat: “[t]here is no one characteristic…which can be said to be decisive in the determination of whether obligations are risk investments in the corporations or debt.”
In recognizing that the maturity is but one factor in determining if an instrument is debt or equity, I am pleased that this final rule adds additional flexibilities for credit unions while maintaining strong guardrails to ensure subordinated debt issuances remain within a federal credit union’s statutory authority.
Today’s rule is something that I certainly support, and I’m especially pleased today that ECIP provides our minority depositories and our CDFIs with the resources to continue providing access to affordable financial services for the most vulnerable of our communities.
With that being said, you’ve all heard me say it, and I’ll say it again today: financial inclusion is the civil rights issue of our generation, and I, again, believe that ECIP was going to bring greater capital and opportunity for credit unions to serve those marginalized communities. I also applaud this program because it ties into our agency's ACCESS initiative. It ties into advancing communities through credit, education, stability, and support.
I would just like to note for the record, when Congress did give the opportunities for the ECIP program with its creation, they had no knowledge at the time that we had the 20-year limitation. So, it was congressional intent from the beginning that it would be banks and credit unions all having 30-years. So, I’m just delighted that we’re able to have parity with the other financial institutions.
I do want to point out the rapid growth of sub debt instruments in the credit union system. For the record, how many sub debt instruments were utilized in the credit union system as of December 31, 2022, relative to December 31, 2021, and how much is government grants vs private markets?
I have also been asked by credit unions why sub debt only counts toward the net worth ratio for low-income credit unions. For the record, can you please elaborate on this?
In closing, I am delighted many LICUs have regulatory benefits, like counting sub debt to count towards the net worth ratio, but I think it is important, Mr. Chairman, that this agency brainstorm additional benefits for being an MDI and perhaps even work with Congress to make legislative changes that may be needed.
I have no further questions or comments.