As Prepared for Delivery on March 16, 2023
Thank you, Justin and Tom.
For years, the NCUA considered how to create a regulatory environment where credit unions could utilize alternative forms of capital, such as secondary capital and subordinated debt. The NCUA formed a working group on secondary capital nearly ten years ago, which kicked off a significant effort by the staff and board. We voted to finalize that rule in December 2020.
Shortly after, Treasury’s Emergency Capital Investment Program (ECIP) provided an unprecedented opportunity for additional capital. But for credit unions to take full advantage of that program – specifically treating Treasury’s 30-year certificates as regulatory capital – required additional adjustments, which leads us to today’s final rule.
Much of today’s final rule deals with synching up the subordinated debt rule with Treasury’s ECIP program, which I know is a welcome change. This rule also brings welcomed flexibility to the maximum maturity of subordinated debt notes. I also appreciate the clarity on the qualified counsel, cashflow projections, and filing requirements.
Although outside the scope of today’s rulemaking, a few important points about sub debt bear repeating.
Subordinated debt in a credit union is a debt security, not an equity security. The only authority under the FCU Act for FCUs to issue sub debt is the borrowing authority. That means the issuances must be in the form of debt. Issuances under the sub debt rule are securities. As such, subordinated debt notes are likely (to some degree) to be subject to the multitude of federal and state securities laws — particularly those related to disclosures and anti-fraud. The final subordinated debt rule included the following statement:
The Board believes it is prudent and responsible to adopt a framework, as discussed in the proposed rule, to aid Issuing Credit Unions in providing Offering Documents to investors. As a prudential regulator, it is incumbent upon the NCUA to include in a rulemaking of this complexity provisions to help ensure credit unions comply with regulatory or statutory requirements, and to help credit unions avoid legal challenges from investors.
Subordinated debt is subordinate to all other claims against the issuing credit union, including those of members, other creditors, and the National Credit Union Share Insurance Fund. Those who buy subordinated debt get paid last in the event the credit union is liquidated.
Subordinated debt is a powerful tool that can assist credit unions in bringing financial services to underserved communities. Chartering new credit unions is one of my priorities. Capital is one of the most critical requirements for chartering a new credit union. I’m pleased that that the subordinated debt rule allows new credit unions to use subordinated debt to meet capital requirements. Additionally, we are working on a provisional charter option which will solve the chicken and egg challenge of “we need capital to get a charter, but we need a charter to get the capital.” Anything that makes it easier to start a new credit union is a step towards true financial inclusion.
Treasury’s ECIP program was a major contributor to the substantial increase in the dollar value of industry-wide subordinated debt this past year. Credit unions played a significant role in delivering funding to communities in need. I’d like to congratulate the staff for the work they did to allow credit unions to take full advantage of the ECIP program, especially given Treasury’s timelines.
Mr. Chairman, that concludes my remarks. I have a question.
The Federal Credit Union Act is clear that credit unions may only issue debt, not equity. Do you have any concerns that a note longer than 20 years is outside the statute?