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NCUA Chairman Todd M. Harper Statement on the Final Rule to Amend the Agency’s Subordinated Debt Rule

March 2023
NCUA Chairman Todd M. Harper Statement on the Final Rule to Amend the Agency’s Subordinated Debt Rule
Todd M. Harper

NCUA Chairman Todd M. Harper during a meeting of the NCUA Board.

As Prepared for Delivery on March 16, 2023

Thank you very much, Justin and Tom, for your presentation on this final rule to amend the maturity requirements for subordinated debt notes and grandfathered secondary capital under the NCUA’s current subordinated debt rule. I appreciate your efforts to expeditiously finalize this rule, which I will support because it facilitates the access of eligible credit unions to the U.S. Department of the Treasury’s Emergency Capital Investment Program, or ECIP for short.

Congress created ECIP to support the communities of color and low-income households hit hardest by the COVID-19 pandemic’s financial and economic disruptions. With rising interest rates, lingering inflation, and continuing economic uncertainty, under-resourced families and communities face many challenges. ECIP funding is a much-needed boost to these communities, allowing them to address short-term needs and achieve long-term financial stability.

Since ECIPs launch in 2021, 83 credit unions have received approximately $2.3 billion in capital investments. What’s more, a new ECIP funding round is underway, and we must ensure those recipients can quickly deploy the funds. This rule does just that.

Specifically, this final rule requires any credit union seeking to issue subordinated debt notes with maturities longer than 20 years to demonstrate how such instruments would continue to be considered “debt.” This final rule also extends the regulatory capital treatment of grandfathered secondary capital underwritten to the later of 30 years from the date of issuance or January 1, 2052. Lastly, four minor modifications to the current rule will make the regulation more user-friendly and increase flexibility for credit unions.

Over the years, many small, low-income, and minority depository institution credit unions have prudently used secondary capital, a form of subordinated debt, to increase their regulatory capital levels to protect against future losses and to serve as a foundation for strategic initiatives and growth. These funds have enabled some low-income credit unions to provide much-needed loan products and other member services within under-resourced communities.

Additionally, over the last year, many complex credit unions — those with $500 million or more in assets — have used subordinated debt to remain well capitalized under our risk-based capital and complex credit union leverage ratio rules. So, by the end of 2022, 154 credit unions of all types had issued $3.4 billion in subordinated debt. That’s nearly double the number of credit unions with subordinated debt a decade ago. That’s a positive development in my view.

Now that the final subordinated debt rule has been in place for a year, what have we seen with respect to complex credit unions using subordinated debt to meet the requirements of the risk-based capital rule and the alternative complex credit union leverage ratio? How much more capital is protecting the Share Insurance Fund from losses — 50 basis points, 100 basis points, or more? Also, how many complex credit unions needed this funding to remain well-capitalized under the risk-based capital rule or the alternative complex credit union leverage ratio?

It is good to hear that the credit union system is stronger and more resilient than before the implementation of these capital standards. While many complex credit unions have used these rules, I’ve also heard that smaller low-income credit unions, especially those under $50 million in assets, have seen their issuances of secondary capital stop. Have there been any issuances of secondary capital not related to ECIP at smaller low-income credit unions during the last year?

I’ve additionally heard that smaller low-income credit unions have encountered difficulties in completing the legal requirements related to the bilateral disclosure document between the credit union obtaining secondary capital and the issuer of such funds. How would this final rule make it easier to complete such deals?

Thank you. We need to ensure that bilateral secondary capital deals for smaller low-income credit unions continue to take place. If there is a problem, then we should fix it.

Some have also suggested that such deals may have dried up because of the change in the interest rate environment over the last year. That might be the case for some deals, but I’m aware that Inclusiv launched a $20 million Racial Equity Investment Fund to deploy secondary capital investments at minority depository institutions. These funds have an interest rate of just 2 percent — which is identical to the rate offered under ECIP — and would advance financial inclusion efforts within communities of color. Yet, none of these funds have gotten deployed.

Tom and Justin, would you look into what more could be done by the NCUA to expedite the release of this funding? Can you also report back to the Board in six months about Inclusiv’s success in getting the Racial Equity Investment Fund deployed and any progress made by smaller low-income credit unions in obtaining non-ECIP secondary capital funds?

Thank you for that commitment. In developing this rule, we did not intend to cut off a critical funding stream to improve financial inclusion within under-resourced communities. I remain committed to getting this rule right and taking further action, whether through regulatory amendments, additional guidance, or some other means.

In closing, this final rule ensures eligible credit unions participating in the ECIP or other government-sponsored initiatives providing needed capital can fully benefit from those initiatives. The 30-year, low-cost, patient capital provided through ECIP will be a game changer in under-resourced communities nationwide. And, with this rule change, credit unions that are either MDIs or CDFIs will be well-positioned to advance economic equity and fulfill their statutory mission of meeting the credit and savings needs of their members, especially those of modest means.

That concludes my remarks. I now recognize Vice Chairman Hauptman.

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