As Prepared for Delivery on January 23, 2020
Thank you for the presentation. I appreciate the hard work and the considerable time and effort each of you and the rest of the team put into formulating the proposed rule for this complex subject.
Many low-income designated credit unions and other financial institutions, have a record of prudently using subordinated debt to increase regulatory capital levels to protect against future losses. Of the credit unions we oversee now, about half are low-income designated. Congress provided federal credit unions with the authority to borrow from any source. Federal credit unions borrowing in the form of subordinated debt is squarely within the statutory authority provided under law.
I support giving complex credit unions the authority to prudently use subordinated debt as an additional tool to comply with risk-based capital requirements, and newly chartered credit unions the ability to use this tool to get up and running. This expanded authority has the potential to currently provide up to 285 credit unions with greater flexibility to augment their capital planning strategies and to support their operations by adding another funding tool. While the 285 may not seem like a large impact compared to the number of credit unions, the complex credit union component will almost double the number of eligible credit unions that may utilize this authority.
However, let me be clear: subordinated debt is not a panacea. It can be expensive and introduce new or different risks. But risk is not an inherently bad thing. But it must be managed. In addition, it is important to ensure the subordinated debt tools properly function to protect the Share Insurance Fund.
In order for a financial instrument to be considered regulatory capital for prompt corrective action purposes, NCUA must consider the instrument’s degree of permanence, capacity to absorb losses while a going concern and flexibility associated with principal and interest payments. Thus, the proposed rule contains various requirements to ensure the subordinated debt will be available to protect the Share Insurance Fund, does not create incentives to engage in unsafe or unsound activities, and preserves the cooperative governance structure of credit unions.
It is essential the NCUA have prudential safeguards and a sound supervisory framework for subordinated debt. It is equally important to have strong investor protections, in particular with respect to suitability requirements and disclosures.
I am pleased to have in this proposal, provisions that not only address the sell side but also the buy side.
In addition to ensuring appropriate safeguards and investor protections, this proposed rule represents a good faith effort to identify areas where we can provide responsible regulatory relief for low-income designated credit unions, and to provide elements that will support the marketability of subordinated debt. One more important note about this proposal is that it will not change how a low-income credit union can benefit from subordinated debt for both net worth and risk-based capital, if complex.
The staff approached this rule holistically — identifying various other related regulations that needed updating and addressing credit unions lending to other credit unions, including in the form of subordinated debt. Staff also considered how the state supervisory authorities would work with NCUA during the approval process.
This complex proposed rule may seem daunting at first glance, but much of what is included is an attempt to be more explicit to increase clarity and transparency for existing expectations and requirements. It is also a significantly improved approach to organizing the related regulatory requirements, which should make it easier for credit unions to find and understand the relevant requirements.
Given the length and complexity of this proposal, I support the recommendation to provide a longer Public Comment period of 120 days, as compared to the typical 60-day comment period for proposed rules. As Lucy Ito of NASCUS noted in her letter to the Board on January 17, “A 120-day comment period is warranted to allow SSAs and all stakeholders the opportunity to fully contemplate the complexity of the subordinated debt concept and its related issues…”
To that end, I look forward to the feedback we will receive from stakeholders.