By Michael C. Macchiarola
With the recent nomination of Tanya Otsuka to the NCUA Board, the end of Board Member Rodney Hood’s second tour on the board is coming into focus. Before he leaves the agency, however, it is appropriate to take measure of just how extraordinary Mr. Hood’s contributions were to the nation’s credit unions and their members.
Certainly, he will be remembered for his indefatigable support for the credit union movement and his ubiquitous presence at credit union events from coast to coast.
In a recent speech at the Defense Credit Union Council, Board Member Hood spoke of the importance of financial inclusion – or as he’s prone to call it -- the defining “civil rights issue of our time.”
Certainly, Board Member Hood can point to several high-profile achievements in the area of inclusion. For example, the NCUA’s DEI Summit has grown every year since it was introduced, and the ACCESS initiative helps to develop policies and programs in support of financial inclusion within the NCUA and across the credit union system more broadly. However, far less attention has been paid to the more technical policy changes that Mr. Hood championed. These changes have led to tangible and, in some cases, quantifiable, improvements in the lives of the underbanked. A few of those contributions are described below.
Non-Member Deposits
Effective January 29, 2020, the NCUA revised its nonmember deposit rule, allowing a credit union to receive public unit and nonmember shares up to 50% of its net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares. The change represented a significant increase from the NCUA's prior limitation at 20% of total shares. Nonmember deposits are an important source of funding for credit unions.
Today, locally sourced member deposits are more difficult than ever to come by. Under then-Chairman Hood, the NCUA’s rule change was quite forward-thinking. In fact, it was remarkably prescient in anticipating the pitched battle to gather deposits that we are witnessing today.
The Risk of Being Loaned Out
At the time of the change, the NCUA observed that following a decade of increasing loan demand, the credit union industry was “loaned out” like never before, with YE 2018 marking the highest loan-to-share ratio (85.5%) in the industry’s history. Having observed the strained liquidity position, the agency was encouraging access to a reliable funding source with more flexibility.
In the time since the liberalization of the non-member deposit limit, outstanding non-member deposits have almost doubled – from $12.43B (Q4 2019) to $24.18B (Q2 2023), and the number of credit unions with non-member deposits on the balance sheet has climbed from 999 to 1,098.
Expanded LICU Rule
In May 2020, the NCUA expanded its low-income designation rule to include active military personnel when determining a credit union’s low-income designation. The change granted military personnel a status similar to that of students attending colleges, universities, vocational or technical schools for purposes of the NCUA’s evaluation of a credit union’s LICU status.
At the time, then-Chairman Hood noted: “This is a great step in being more inclusive when it comes to the members of the military. Because so many military members are just getting started, they may not have much experience in working with financial institutions, at least not yet . . . under my direction, the agency has determined we can encourage military service in a similar way [to students].”
In the time since the expansion of the LICU designation rule, the amount of assets managed by LICUs has increased from $768 billion (Q1 2020) to more than $1.2 trillion (Q2 2023), and the number of credit unions with a low-income designation has jumped from 2,393 to 2,599, representing 54% of the industry.
Updated Derivatives Rule
In May 2021, the NCUA Board modernized its derivatives rule, making it more principles-based while retaining essential safety and soundness components. The changes also ensured that credit unions establish certain “guardrails,” such as derivatives training and strong internal controls.
At the time, the board warned that the ability to manage interest-rate risk was crucial to financial performance. With rate increases on the horizon, the change represented a timely and appropriate measure to encourage credit unions to manage a variety of interest-rate scenarios by deploying simple derivatives to hedge their portfolios.
From the time of the rule’s adoption (Q2 2021) through the end of last quarter (Q2 2023), the number of credit unions using derivatives to hedge interest rates grew from 88 to 122, representing a 38.6% increase. Unfortunately, despite ample encouragement from the NCUA board, many were too slow to move. As a result, they were largely unprepared for the aggressive increase in interest rates that decimated investment and loan portfolios across the industry.
Subordinated Debt Rule
As the calendar turned to 2022, the NCUA ushered in a new Subordinated Debt Rule, rebranding secondary capital as “subordinated debt,” and expanding the universe of credit unions that could include this subordinated debt in their net worth and Risk Based Capital calculations.
Under the new regime, all LICUs, complex credit unions, and new credit unions were authorized to issue subordinated debt for purposes of regulatory capital, with NCUA approval. As Board Member Hood noted at the rule’s adoption, the changes meant that 55% of all credit unions were eligible to issue subordinated debt.
A Ballooning Market
In the time since the adoption of the improved rule, the market has ballooned from $948 million (Q4 2021) to $3.67 billion (Q2 2023) of outstanding credit union subordinated debt. The additional $2.72 billion of capital created since the beginning of 2022 has equated to roughly $25 billion in additional lending power for credit unions across the country.
Moreover, with nearly all of the outstanding subordinated debt being issued by LICUs, the vast majority of the rule changes that Mr. Hood shepherded have benefited those members most in need. In fact, the change to encourage a sensible, streamlined, and accessible subordinated debt process for credit unions might be Mr. Hood’s greatest tangible accomplishment aimed at inclusion.
A Lasting Record on Inclusion
Aside from Mr. Hood’s tireless support for the movement and his good cheer and support for “people helping people,” he should be remembered for a tangible and lasting record of achievement when it comes to inclusion. Mr. Hood has moved the ball well down the field on the civil rights issue of our time. For his efforts and a meaningful contribution to improving the lives of countless Americans, he deserves our thanks and best wishes in his future endeavors.
Michael Macchiarola is CEO of Olden Lane Inc.