ALEXANDRIA, Va.—The NCUA board Thursday unanimously approved a proposed rule to change the maturity requirements for subordinated debt notes and grandfathered secondary capital under the NCUA’s current subordinated debt rule.
The change would give greater flexibility to credit unions seeking subordinated debt beyond 20-year maturities. The maturity is based on the credit union demonstrating why the maturity should be longer than 20 years, the proposed rule states.
The U.S. Department of the Treasury’s ECIP grant funds can be held up to 30 years. However, NCUA’s current subordinated debt rule generally limits maturity levels to 20 years. To fix this maturity mismatch, NCUA said the proposed rule would align the NCUA’s subordinated debt rule with the Treasury Department’s ECIP rule.
Board Vice Chairman Kyle Hauptman noted that for many years NCUA has been considering how to create a regulatory environment in which 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,” explained Hauptman. “Then, Treasury’s Emergency Capital Investment Program fueled a great deal of work allowing credit unions to take full advantage of the program. Which leads us to where we are today.”
Hauptman emphasized that subordinated debt in a credit union is a security, not an equity.
“Great care went into this important point,” he said.
Three Main Components
The proposed rule has three main components:
- The rule 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.
- The rule would extend the regulatory capital treatment of grandfathered secondary capital to the later of 30 years from the date of issuance or Jan. 1, 2052. This change is especially important for ECIP to work as Congress intended.
- The proposed rule would make four other minor modifications to the current subordinated debt rule.
Board Chairman Todd Harper said he supported the 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,” Harper said. “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.”
Financial Inclusion
Board Member Rodney Hood addressed how the changes will impact financial inclusion.
“You have all heard me mention how financial inclusion is indeed a civil rights issue of our time,” stated Hood. “I believe ECIP will bring greater capital and opportunity for credit unions to serve marginalized communities. I also applaud this program because it ties in quite directly with our ACCESS (Advancing Communities through Credit, Education, Stability and Support) initiative.”
The NCUA board finalized the current subordinated debt rule in December 2020 with an effective date of Jan. 1, 2022.