With a rising interest rate environment, inflationary pressures, and increasing loan-to-share ratios nearing 90%, credit unions must find ways to mitigate risks to their balance sheet, and accessing liquidity is an integral component.

National Credit Union Administration (NCUA) Board Member Rodney Hood joins “C.U. on the Show” to discuss how establishing various lines of capital can help credit unions manage risks, stay nimble in a complex financial landscape, and leverage 21st century solutions. 

Rejoining the NCUA in April 2019, Hood has a wealth of knowledge in finance and government and is a leading voice in the credit union industry. As a board member, Hood serves as the NCUA’s representative on the board of directors of NeighborWorks America, one of the nation’s leading affordable housing and community development organizations. 

Capital Markets Symposium

Secondary capital can help a credit union manage an emergency, increase net worth, make strategic investments, and practice good balance sheet management overall. To address pressing liquidity concerns, Hood recently hosted the inaugural, first-of-its-kind Capital Markets Symposium at the New York Stock Exchange. Prompted by current interest rate and balance sheet risks, the summit, which followed the Silicon Valley Bank collapse, reinforced the urgency of liquidity for credit unions. Credit union leaders and financial experts gathered to discuss the various liquidity sources available to credit unions, use cases, and how to effectively manage funding relationships.

Liquidity Sources Credit Unions Can Leverage

The primary takeaway from the symposium was the level of sophistication and plethora of liquidity sources and tools available to credit unions, including subordinated debt, Federal Home Loan Banks, local Federal Reserve Banks, and the NCUA’s Central Liquidity Facility. When sourcing funding options, Hood says credit unions should consider the following:

  • Build an ongoing relationship with the source and keep communication lines open. 
  • Test the liquidity source regularly to ensure it’s available when needed.
  • Engage your board and CFO in understanding the overall strategy, including loan pricing, terms, and compliance requirements. 
  • Explore the underlying issues for your capital needs. For example, it shouldn’t mask poor performance but is an option for growth and advancement opportunities. 

The NCUA provides informational webinars, seminars, and resources to make finding and selecting liquidity sources and navigating the legal requirements easier. While there are still aspects to fine-tune, Hood doesn’t want credit unions to fear secondary capital. As he explains, liquidity is only one component of a credit union’s strategy when managing its balance sheet, rising interest rates, duration, appropriate pricing, and loan participations.

The NCUA Office of Innovation and Access

Hood also shares how he recently spearheaded the establishment of the NCUA’s Office of Innovation and Access. Some of the goals of the new department include:

Stream the full episode to learn more, including:

Rodney Hood and the NCUA are not affiliated with or endorsed by ACT Advisors, LLC. 

Audio Transcription (pulled from the podcast)

Doug English  (00:00)

Welcome to today’s podcast! I am thrilled to introduce our guest, National Credit Union Administration Board Member Rodney Hood. With a wealth of experience in finance and government, Board Member Hood is a leading voice in the credit union industry. Recently, he hosted the Capital Markets Symposium at the New York Stock Exchange, and he has also been instrumental in establishing the Office of Innovation at the NCUA, which offers forward-thinking solutions for credit unions facing challenges in the 21st century. In this episode, we will delve into the pressing issue of liquidity for credit unions, including the need to test these lines of liquidity. Board Member Hood will share his insights on how credit unions can leverage innovative resources to navigate today’s complex financial landscape. Join us as we explore these important topics with Rodney Hood.

Rodney Hood, thank you for joining us today. I’m delighted to have you on “CU on the Show.”

Board Member Hood  (00:54)

Doug, I’m delighted to join you and thank you so much for your kind invitation.

Doug English  (00:58)

Recently, you held the Capital Markets Symposium at Wall Street in New York City. And it sounded like an absolutely terrific event. Tell us a little bit about what went on there and your objectives.

Board Member Hood  (01:11)

Doug, what a good question. And yes, you’re right. Just a few weeks ago, on April 11, I was really fortunate to be able to work with some of the leaders at the New York Stock Exchange and have a platform for credit unions to come together to look at what are the tools Wall Street provides our credit unions so they can really have a safe and sound operating environment. As the former chairman of the agency and now as a board member, my paramount responsibility is ensuring the safety and soundness of nearly 4,800 credit unions that serve some 135 million members. So think about it Doug, roughly a third of the American public has a credit union account. Assets to date, approximate $2.2 trillion. Of that we have loans that exceed $1.5 trillion. So what that tells me is credit unions are really using tools today to originate those types of loan activities, they have assets they are overseeing. I am bringing together nearly 150 credit unions to the stock exchange for them to hear about what are some of the things they can do in today’s rising interest rate environment to mitigate interest rate risk on their balance sheets. I mentioned that outstanding loan volume of about 1.5 trillion? Well, you know what, many of our credit unions have loan-to-share ratios at 80, 90, in some instances, 100%. That means in funding a lot of that loan volume, they are now going to need to look for additional sources of liquidity. So at the Wall Street symposium, we were able to talk about additional liquidity sources. We were also able to talk about things such as subordinated debt and asset securitization. So it was, Doug, having a very forward-thinking, forward-looking approach to what things credit unions are doing. The people at the NYSE were thrilled. In fact, people often ask why it was that the New York Stock Exchange invited us to do this. Because to their knowledge, no one from NCUA has ever done an event on Wall Street or especially at the New York Stock Exchange. The event you were referencing earlier, it stems from a meeting I had with the leaders at the NYSE about nine months ago. They invited me over for lunch just to talk about work I do as a financial regulator. And in the course of that luncheon, I mentioned one of our credit unions had done the largest ever asset securitization of its auto portfolio for about $450 million. I mentioned that credit unions are using secondary capital and subordinated debt to the tune now of over $530 million in outstanding volume. I mentioned we were also doing interest rate swaps and derivatives to the tune of $3 billion. And that caught a lot of people’s attention. They went from it being a very what I would call a perfunctory very nice lunch with a financial regulator to one of wow! They were so amazed at how credit unions of yesteryear, which is what their perception was, have morphed to today’s 21st century institutions that are using the tools of today to have longevity and to help their members to have access to affordable capital. So it was just a wonderful way to bring that event together. And Doug, what people were asking as well is, did I plan that particular event in response to what we’ve all seen play out regarding Silicon Valley Bank, Signature Bank, and First Republic? My answer to that is actually no, we were already planning to talk about these topics, because that’s what good prudent regulators do. We try to stay ahead of the curve. We knew where interest rates were. I can’t predict where they’re going to ultimately end up. But I could say we already saw the rapid rising or the increases we’ve seen over the past few months, and I think those could continue; we were already looking at trends. So if anything, while our summit wasn’t a response to what happened with Silicon Valley Bank, I tell folks it certainly was just perfect timing. And perhaps had they and some of their institutions had done maybe a similar summit, maybe that would have waved off some of the things we’ve seen play out with them, but the point is, it was timely. And it worked out well.

Doug English  (05:36)

The timing really couldn’t have been any better. So in looking at the content, there are several categories of liquidity sources. And I thought maybe we could see if you had any comments on each source. So one of the first speakers was Cathie Mahon. I’m not sure if I’m saying her name right.

Board Member Hood  (05:57)

Yeah, Cathie Mahon. And Cathie Mahon is from Inclusiv. She works with our community development, our low-income designated credit unions, and she was able to talk about some of those sources and one of the sources of secondary capital subordinated debt. We had a rulemaking not too long ago: any credit union that is a low-income designated credit union can go to the secondary market, that can be investors, that can be other banks that maybe want to invest in some of these debt instruments or equity for Community Reinvestment Act purposes. So Cathie was able to really talk clearly and cogently about what low-income designated credit unions can do, by way of not only getting access to the secondary capital but it can also go into helping them with their net worth. Doug, credit unions today have probably one of the highest net worth they’ve had in about 20 years. So their net worth today exceeds what it even was pre-recession of 2008. Collectively, we’re looking at about 10.9% net worth. And that means credit unions have almost gotten to about 400 basis points or 4% beyond their statutory requirement. And Cathie was making the point that the smaller credit unions, those low-income designated credit unions, when they avail themselves of some of these tools that are out there, that can also help count as a part of their net worth ratio. Now we also had some other folks who were able to talk about some of the large institutions. We did do a rulemaking not long ago where what we would call complex credit unions, those are credit unions that are $500 million and above in assets. Those specific credit unions are also able to use these tools, and they could not have it count toward their capital, but they can still use it because it may be able to help them with a growth strategy, maybe with serving underserved low to moderate income communities. So that whole panel talked about a lot of the resources that are out there. And I’m glad Cathie, again from Inclusiv, was able to kick it off as our first speaker.

Doug English  (08:07)

I took a quote away from Tim, from Alloya. He said our advice remains simple to our members. Think about liquidity every day. Think about it when there’s a need for it, think about it when there’s not a need for it, but maximize your sources of funding.

Board Member Hood  (08:23)

Exactly. And I couldn’t agree with what Tim said more, Doug. In fact, liquidity is a lot like oxygen. You know it’s there, but you really don’t recognize it until it disappears. And that’s why we need to really be very conscientious in the credit union system about making sure we know about those liquidity sources, whether that is through again, using some of the tools that were discussed. And also, NCUA has liquidity sources we provide as well. We have our very own central liquidity facility. And that is a facility that we expect any of our credit unions that are smaller than $250 million in assets, we want them to avail themselves of the CLF. It is managed and operated by a gentleman at our agency by the name of Anthony Cappetta. And he also was able to talk to credit—it’s about not having a fear of using the tool because it is there to assist them in moments of need and moments of stress. And also, with some of the lending we’re seeing now, they’ve had a high loan-to-share ratio within, so they may want to use that facility. Another piece of information that was really helpful was that we also have great relationships with the Federal Home Loan Banks. I was very fortunate that I got a chance in addition to hosting the whole symposium, I was able to break away and host a fireside chat with the presidents of the Federal Home Loan Banks of New York and Atlanta, where we talked about the Federal Home Loan Banks. They also are a liquidity source for credit unions. They pledge collateral, they pledge mortgages, but in so doing, they are able to get advances on those particular loans they’re pledging. The Federal Home Loan Bank System really wants to be that port in the storm when it comes to providing not just emergency liquidity, but providing resources around affordable home purchases and things of that nature. One of their mandates is to make homeownership affordable; they are able to take 10% of their profits and remargin those or redistribute those into communities they serve. So in working with those two presidents, Jose Gonzalez and Kirk Malmberg, we were able to really have a very robust dialog about all the work the Federal Home Loan Bank is doing. And then another source that was also highlighted at the symposium was that of the Federal Reserve, and credit unions have access to the discount window. And we certainly want them to make use of those tools. But we also want them to test them, again, like liquidity. As I mentioned, it’s like oxygen, you don’t really notice it until it’s gone. Well, we want credit unions to have those ongoing relationships and lines already established with their local Federal Reserves. And what that means is, are you testing the line? Are you making sure you’re keeping that door of communication open? The last thing I’d like to see with credit unions is that you call one of your liquidity sources only when you are in the middle of an emergency; I think it should be an ongoing relationship that’s built. So when you do really need to test and try that line, it’s already been tested and proven and will be there for you. Yes, Doug, we had some great information we shared that day. And we are just thrilled that we had almost 150 credit union participants there; they were all taking notes and also really following up even with us as the agency in terms of what would be some next steps.

Doug English  (11:49)

Well, that’s exactly where I was headed. So you talked about several things I took notes on. The FHLB, Mr. Gonzalez from New York, he had some lines that really struck me about the FHLB being a member-driven cooperative similar to the credit union system with the lowest cost of funds, second only to the United States Treasury. That was really striking. The suggestion was credit unions need to have a relationship. Then what you’re saying is that they need to test those lines, test those lines of liquidity.

Board Member Hood  (12:24)

Yes, again, you want to make sure that line is going to be there when you need it. And again, it’s about building that relationship, and you hit it right on the head. In fact, I was so delighted when that was mentioned during the fireside chat. Like credit unions, the Federal Home Loan Banks, they are member centric, we all have that sheer cooperative spirit, which is why I think credit unions now are partnering more with the Federal Home Loan Banks. When I was last at the agency—I did serve at the agency well over a decade ago when I was vice chairman—and a lot of the things I did then was try to create opportunities for credit unions to work with their local Federal Home Loan Banks. And it was, I would say, easier said than done about 15 or so years ago. But now fast forward to today, we have about 250 or so credit unions that are actively involved with their local Federal Home Loan Banks. And more importantly, as a sign of the relationships growing, we’re seeing board members of credit unions on the Federal Home Loan Bank boards. As you know, those are all voted on. It’s all again very similar to how we do our voting structure. But the fact is that 15 years ago, we had very little to any Federal Home Loan Bank and credit union engagement to now great engagement that’s robust. In addition to that, board members are all on some of those banks’ boards, especially in San Francisco, where nearly 40% of that Federal Home Loan Bank board is comprised of credit union board members, and we have at least one board member on the Federal Home Loan Bank of Atlanta board who’s from one of the local credit unions.

Doug English  (13:58)

Mr. Gonzalez mentioned that 30% of his members are credit unions. I thought that was a delight and a surprise.

Board Member Hood  (14:08)

Really so. In fact, what you’re seeing now is the Federal Home Loan Bank System being even more intentional about having a strategy around reaching out to credit unions. On many occasions, I have done podcasts and speeches with the Federal Home Loan Bank in Atlanta, and Mr. Gonzalez now wants to do a similar thing where he is going to be doing credit union roundtables. Atlanta has done quite a bit of that; Federal Home Loan Bank of San Francisco has done quite a bit of that. So I think what’s really interesting is they are now not just waiting for credit unions to just sort of pop in and call them but now there is going to be more intentionality around having a direct engagement strategy with credit unions. I’m really proud of that. Also at my summit was someone you may not have met yet but if you would like to, we certainly can put you in touch, and that’s Ryan Donovan. Ryan Donovan, now he’s left the credit union space. As you know, he was the head of government affairs at CUNA, Credit Union National Association, one of the trade groups, while he is now taking a leadership role for the Federal Home Loan Bank system. So that means he has that regulatory voice, that policy voice for all the Federal Home Loan Banks, whether it be Dallas, San Francisco, Kansas, Chicago, New York. He is that person who is working with all of them. And I think it bodes well that you have an erstwhile leader of a credit union trade organization who is now in a key driving role there at the Federal Home Loan Bank System. Now of course, he’s going to be working for all of the financial services. So he’s not just going to have a penchant for credit unions but the point is someone who understands the cooperative nature of credit unions is in that role; I think it’s just delightful. And he was also at the event.

Doug English  (15:58)

Excellent. You mentioned subordinated debt a minute ago and I’m wondering if you had any comments on the opportunity to get pre-approved or subordinated debt; who should do that? Who shouldn’t do that? Any suggested uses or things not to do with subdebt?

Board Member Hood  (16:16)

Well, I would say the main thing is about what not to do with it. I think what they can do with it is if they’re going to use it strategically, and again, those low-income designated credit unions, those community development credit unions, those are the ones that tend to be smaller than average. So those are the ones using it. And it’s because they really do want to help with perhaps a capital deficiency or they really want to bolster capital. My advice to them is to talk it over with their boards to make sure they have a strategy because these are debts that really will need to be paid back. So to make sure they’re looking at the pricing, especially in today’s interest rate environment. But I want folks not to be afraid of it. In fact, that’s another reason why I’m glad groups like Inclusiv and we at NCUA, we’re doing webinars and seminars and all those things on the use cases for subordinated debt and secondary capital. As you know, Treasury certainly wants all financial institutions to have access to those types of tools, most notably through the emergency capital investment program, ECIP. We at NCUA have approved that emergency capital investment program so we had to do a rulemaking. So now that is going through the approval process, that’s going to be another tool, in addition to credit unions on their own, using subordinated debt and secondary capital, we’re going to now have some Treasury resources as well, again, through the ECIP, which was highlighted. So my main thing is, when credit unions are pursuing these tools, to make sure there is board engagement, there’s board understanding, and also senior leadership, especially the CFO, do they recognize their requirements? Also, these are legal documents, and one of the things we are trying to work on that’s been an impediment, some of the smaller credit unions, yes, they may have all of the resources to embark upon using some of these tools but sometimes the legal costs of documents and legal review are not affordable, so we are looking at how do we fine-tune that? Can there have been some documents that are perhaps boilerplate? Can there be some documents they can maybe have in a portal that they populate? But again, how do we make sure we navigate that? So that’s something that has been brought to our attention, believe it or not by one of the participants at the summit who wants to engage, but they were blown away by some of the legal costs it takes to execute some of the documents that are going to be required. So we’re looking at how we fine-tune that process. So that’s one thing, but I would just say embarking upon these, pursue them but study them and don’t think it’s a panacea. If there are underlying reasons as to why your capital base is not what it should be, yes, I think that’s something you need to explore now. Capital, subordinated debt, and secondary capital are not meant to replace your overall strategy. It is meant to be a component—look at it as an ingredient or something like that but don’t look at it as something that’s going to disguise perhaps poor performance or other underlying issues. So we still want you to practice good balance sheet management. Are you looking at duration risk on your balance sheet so you’re doing all the things we want credit unions to do? And then if you’re doing all those things and using the tools and you want to use this as an enhancement so be it but don’t use it to mask other underlying issues.

Doug English  (19:48)

You had a credit union CEO as part of your panel, Mr. James Schenck. He did a beautiful job talking about the primary way you control your balance sheet is through price. And then the next step was loan participations as a method to manage the bigger flows. And then he went into derivatives and managing interest rate risk with derivatives as you said, for the larger, more sophisticated credit unions that becomes an option. And I wondered if you had thoughts about the sort of the layering of steps that a credit union could do. We kind of already have given the listeners the takeaway that you should have many sources of liquidity, that you should test these sources of liquidity on a regular basis, you should have a relationship with your Fed, with the FHLB, with numerous private parties as well. How often should they test these lines? Do you have thoughts around the frequency of that testing system?

Board Member Hood  (20:50)

You know what, I think that’s going to vary by the asset size and complexity of the credit union. So I would say asset size complexity, I think, the cadence of when they’re doing these types of activities, I think it is going to vary. But the main thing is just an awareness that they need to test awareness, that they need to build the relationships. And the last thing you want is to have a desperate need. And then we think we have a relationship with that source. And that source is not able to help you when you need a lifeline. But the interest rate risks and the derivatives piece, that is one way to really mitigate risk. And again, these are instruments that are for some of the larger institutions. As you mentioned, Mr. Schenck from PenFed, a lot of our credit unions are using those tools. In fact, I think the last I checked, I had data that said about $900 million is being used to notional value when it comes to some of the derivatives, contracts, and interest rate swaps that are out there. We were very fortunate to have Russ Denham, who is the chairman of the commodities future trading commission. As you know, he is the derivatives prudential regulator, just as I and my group, we oversee credit funds where he oversees the commodities market, and that does encompass the derivatives. So his piece was, again, safely and soundly. Are you looking at the contracts? Are you really making sure you know your counterparties and again, doing your due diligence? The fact that credit unions are now embarking upon these tools, and again, not for the faint of heart, I’m not going to expect a $100 million credit union to have some of the hedging techniques that our multibillion dollar credit union is going to have. So I think it’s all about relative and scale. But the main thing is, what I am trying to convey through summits like the Capital Markets Summit is that credit unions have a plethora of tools. And let’s make sure they know about them. So if anything, Doug, that summit brought to light all of the sophistication and all of the tools and techniques that can be deployed. Remember, we had Mary Beth Spuck talking about asset leasebacks and things of that nature on that panel. That’s another way of helping with credit unions in terms of similar liquidity. You highlighted loan participations; we have a rulemaking I’d like to see come before the board; we’ve done a request for comment that we’re wanting to remove some of the impediments for credit unions for wanting to engage and having more loan participation to get liquidity on their balance sheets. And one of the things we’re looking at is maybe removing that 5% maximum threshold of your assets; who are we to determine what your maximum should be? Let’s let that be a risk-tailored, principles-based approach and let the credit unions and their board determine what is that appropriate percentage. Similarly, why do we make the stipulation that needs to be a camel coat at one or two credit union engaged in some of the sales? Let’s make sure any credit union that can have an active relationship can be a part of this. And another thing is looking at do we really need to have for certain asset sizes or loan participation deals, the imprimatur of our one of our three regional managers? You know, the credit unions have three distinct regions they will roll under with the exception of a separate area for what we call the office of national exam supervision. And those are the credit unions that exceed $15 billion. So I do want to work diligently with my fellow board members to have a loan participation rule that will even go a step further than what’s been taking place today. And a lot of that, Doug, will be the loan participation rule. The reason I’m so eager about that is that I did work with my fellow board members on a CUSO rule, Credit Union Service Organizations, these are the credit union groups that get all the credit unions together, and they will invest in a shared platform or share technology. They will all invest in types of activities. So you can have 20 credit unions investing in one CUSO or you could have one CUSO that’s a fintech that’s helping with data aggregation or expediting loan originations and things of that nature. So the CUSO rule, basically, as was written, CUSOs can now originate loans, they can originate any of the loans that our natural person credit unions can. Well, now that that rule has come to fruition, the next companion piece to that is the loan participation rule I’m wanting to see put forward with our agency to let the credit unions buy some of those CUSO participations, and the rest. These 21st century solutions will help our 21st century credit unions evolve in today’s dynamic marketplace. That’s why I’m so passionate about the matters we’re discussing today. That’s why I wanted to put a lot of energy into bringing that forum together. I think these are all things people would expect of regulators that want to keep them safe and sound.

Doug English  (25:45)

You mentioned the regulations you would like to change. Are there other regulations you would change if you had the votes?

Board Member Hood  (25:52)

Well, I would certainly love to see the loan participations rule, that is one. Not knowing where the votes are now, but again, I know that it’s something the industry, I think, has looked into. And we’ve already gotten some very positive feedback from our institutions that have written us responses in the rulemaking process. Since you work in the industry, you know we put out a rule for comment, we take those comments, and then we analyze them and assess and by all measures the response around the loan participations and removing some of the impediments I just enunciated has been resoundingly supported. So we shall see. That’s one of the biggest rulemakings on the horizon.

Doug English  (26:36)

So we talked about the many sources of liquidity you would like credit unions to be aware of and be in contact with those sources and to be testing them. What other takeaways should we talk about from the symposium?

Board Member Hood  (26:48)

I would just say the main takeaways from the symposium, the main one I want folks to recognize is that NCUA, really as the prudential regulator of credit unions, wants our institutions to know there are tools available they can use for the safety and soundness of their institutions, and also for really helping their member owners have 21st century solutions. I think the main takeaway is that NCUA believes firmly in appropriate balance sheet management. We want you to look at duration risk on your balance sheets. It’s so critically important that you’re pricing loans appropriately. One of the things that data tells us is that credit unions tend to lag the banks and community institutions when it comes to raising their loan rates when the other banks and institutions are raising their rates in response to the Federal Reserve. So I’m hoping now that we’ve seen almost 450 basis points and interest rate hikes from the Federal Reserve, our credit unions are now really recognizing the important role looking at appropriate risk pricing or but more importantly looking at pricing can play if they’re looking at mitigating balance sheet risk. I think also the interest rate risk piece is recognizing that we are still going to be working with credit unions through the supervisory process, we’re going to want to look at your strategies, we’re going to look at your what is the board-approved policy, and we are still looking at this in a principles-based approach. And I want folks to know that is not a one-size-fits-all; we’re going to be looking at credit unions by asset size and complexity. And again, what are you doing to ensure compliance even with your intended policies around interest rate risk? What are you doing around liquidity risk, credit risk? All of the things we were able to discuss at the summit. And the main thing I want folks to know is we want you to reach out to us if there are questions, reach out to your supervisory examiner. I know I as a board member when I’m traveling pretty much the country talking about these issues, I want to be that repository. So when credit unions have issues, come to me, let me know what your thoughts are. And that’s how we were able to look at that whole piece, Doug, that I mentioned about the legal contracts in the subordinated debt. Only when I hear from folks at different types of convenings can I take demonstrable action. So if anything, the takeaway is the summit was there for folks to learn, glean insight, know what tools are there, what’s at their disposal, the website, our website, and also the New York Stock Exchange also has the full convening available. So I like for folks like you, Doug, to be able to use that as a tool and a guiding principle of sources. So to see what’s played out. And I think the main thing I would say is the takeaway is that credit unions were able to see that they’ve been remarkably resilient in the midst of the headwinds, whether it be the Silicon Valley Bank debacle, what we’re seeing with geopolitical tension, inflationary pressures, in spite of it all, the one thing I wanted to convey during the summit was that credit unions have weathered the storm well. And I think we have all the tools at our disposal to help address any issues on the horizon. So yes, capital being nearly higher than it’s been in quite some time at nearly 11%. The fact that yes, while liquidity may be somewhat constrained, we have a plethora of resources. Again, Federal Home Loan Bank, Federal Reserve, and our very own central liquidity facility we have at NCUA. So I remain bullish about the credit union system, and I remain ever so positive that they are going to be able to continue providing affordable and accessible financial services to nearly a third of the American people that have a credit union account. 

Doug English  (30:48)

Well, thank you for your leadership and bringing this symposium to be a great event. Let’s talk a little bit about some of the other work you do in the Office of Innovation.

Board Member Hood  (30:58)

From my time joining the NCUA board in April 2019, I spent about a decade on Wall Street between the last time I was at the agency and when I returned in 2019. And I saw from where I sit on Wall Street, the speed in which technology was just really permeating all of the financial services arena. And I also recognize there were some good actors and bad actors when it comes to financial technology. I do think the bad actors tend to get a lot of the news coverage but we never think about those positive actors or those positive players out there. So when I returned to the agency in April 2019, I knew that more needed to be done to marry fintech technology with credit unions that wanted to better serve their members. And I wanted folks to realize that yes, there were some disruptive folks in the fintech space that perhaps did not have the best interest of propagators at heart. But then again, the more I was able to do research and meet with folks, I was able to meet some of the fintechs that really do care about serving people who are low to moderate income, people who want fintechs that are going to really help the Diversity, Equity and Inclusion issue. So I, with my fellow board members, was able to really create a new opportunity. We created our Office of Innovation at the NCUA. All of the financial regulatory agencies in Washington all have offices of technology—the FDIC, the OCC, the Federal Reserve, the CFPB. They all have offices of innovation. But by being last in creating our office, we were able to glean a lot of insight from them. And one of the pieces of insight I gleaned is that you did not want your innovation office to be a best kept secret. I wanted to make sure in creating our Office of Innovation, we were able to have an office that was going to be facing the public. In addition to working with us internally, we wanted someone who was going to look at accessibility. I often say that financial inclusion is the civil rights issue of our generation. What are we in the credit union space doing to provide broader financial inclusion and access to some 65 million individuals who are credit invisible? What are we doing to provide access to affordable loans for the 40% of American households who cannot obtain $400 in a family emergency. So I am looking at technology being able to help bridge a lot of those divides that have kept people on the sidelines of economic inclusion. So our office is the Office of Innovation and Access; it means they are going to work together. And I talked about intentionality. Just as I talked about intentionality about looking at balance, sheet risk, and things of that nature. We want to show intentionality that we’re not innovating just because it’s what all the cool kids are doing. We’re innovating because if done and deployed strategically, it can bring about greater financial access. So that’s why the Office of Innovation, and we just hired a gentleman to run that group, and the Office of Access, we have a young lady running that group. So Charles Vise is the Office of Innovation. Access is run by Natasha McAdoo. They are working together around how these fintech tools can provide real-world solutions. One of the things I started with, Doug, before we were able to hire Charles Vise, it took me two years to find the perfect candidate. I wanted someone who knew technology, knew policy but also knew credit unions. One of the things when I’m meeting with fintech providers, is I tell them that credit unions are not merely banks by a different name. But these are mission-driven, purpose-aligned institutions. And I never want them to lose sight of that. So finding the right person was equally important to me as anything. But what I’ve been doing before we got him on board, because there are some 400 fintechs that are now working with credit unions, I started a fintech discussion series. Every other week, we at NCUA bring in a different fintech to the agency to meet with our people at Risk Examination and Insurance, those regional managers or regional directors we call them, who oversee the United States for credit, and so they’re divided in thirds. So they all get to hear in real time. What are these technology providers doing with the credit unions? Are they looking at consumer compliance, consumer protection? Are they really helping those credit unions use data strategically to serve their members? So I think the main thing about the fintech discussion series is that examiners by their work that they do are pretty risk averse. So if they don’t understand something, they are going to assume well, what is this person doing that’s a fintech? So I’m trying to make sure we are providing clarity and insight such that when our folks encounter fintech, and we’re doing that third-party due diligence and things of that nature, there’s going to be more of a familiarity. Oh, we know what that fintech is doing. We know they have already worked with CFPB to learn how they can have a greater fidelity around consumer protection and things of that nature. So that’s what we’ve done with the fintech discussion series. I’d like to also have us do a Shark Tank-like event where we solve everyday problems through the use of technology. One such area I mentioned, my question around providing greater financial inclusion. Well, you know what, let’s see if we can get some social entrepreneurs who want to be engaged with financial inclusion. And let’s get maybe some of the venture capital folks who are supporting credit unions. As you know, there’s almost $900 million in venture capital funds that are within the credit union system. So let’s see how they can maybe do some type of Shark Tank-like event around maybe we’ll start with financial inclusion, and then maybe do one in the future around maybe faster payments, how do we get those small businesses and those folks to really get faster access to their funds and then maybe do something around compliance? How do we use technology to help us with maybe Bank Secrecy Act compliance or Know Your Customer compliance so again, looking very holistically at some of the things that can be done through like a Shark Tank-like event. And Doug, I’ll also talk about what our peers in the United Kingdom have done. In fact, whenever I’m in the United Kingdom, in fact, I’ll be there soon; I’m going to be their keynote speaker at the credit unions conference in the UK, where I’ll be talking about what credit unions in the United States are doing to build a brighter future for their members. So I’m going to talk a little bit about technology and the Financial Conduct Authority, their prudential regulator. They were really the first to pilot something we call a sandbox. And that is you take that fintech before they go public and mainstream, the regulator works with them to address the regulatory impediments and deficiencies such that when that fintech does go live and scale up and really get ready to serve, they’re not going to be wrestling with a fine or a penalty because they perhaps did not really do all the things they should have done in looking at some of the regulatory compliance activities. So they have done sandboxing, the fintechs, and through the prudential regulator in Singapore have done a similar approach. So I certainly would like to see us look at doing a sandbox-like approach in the States. So I know I’ve given you a mouthful regarding innovation and access and what my thoughts are. And I’m just delighted my fellow board members did support me on that. And again, we have the new Office of Innovation. And yes, it is something other financial regulators have had but I think ours is going to be going about it a little differently.

Doug English  (38:51)

Well, I am delighted about the subjects we’ve covered today, talking about liquidity in the credit union movement and making sure our leaders know the various sources, how to get in touch to test those sources, and to keep in touch with the NCUA with what’s changing. And then the Office of Innovation to push the credit union movement forward to make sure this movement stays strong and viable for all of our kids into the future.

Board Member Hood  (39:20)

I couldn’t agree with you more. Yes, sir. Gen Z, the millennials, those 135 million folks who are members of credit unions, they want their credit unions to serve them in the manner that they expect to be served. And it’s technology. I think we have traditionally looked at bricks and mortar but gone is that day, Doug. And I think that’s another reason as to why I’ve been so zealous in this pursuit. And again, I think pre-COVID we’d looked at a lot of the fintech tools as a cute luxury. And I think now it’s become more of a strategic imperative, which is why I think if credit unions don’t embrace these tools fully, do I even have a system to regulate? I think with those 135 million members, they will be willing to walk if they are not able to use remote deposit or capture some of the other types of things that are really readily available. So that’s why, again, I’m trying to be a forward-thinking, progressive-thinking regulator, not looking at what gets me through the end of the year but what gets me through the next half decade, decade. And again, technology is the way to do it. And I think we’ve seen some of our credit unions, lamentably, have lost ground when it comes to member satisfaction. As you know, we used to have the highest scores when it came to Gallup and the scores are still high when you look at credit unions compared to other financial services providers but there has been a slight downward tick. And that’s really because of the lack of technology and that not all credit unions have really raced to really embrace a lot of the platforms others are providing. So I think we’re going to start seeing more technology deploy. And I think we’re going to see a lot of those types of Gallup polls survey results going up again, in a positive trend. So again, this is not a luxury but a business imperative around embracing innovation.

Doug English  (41:13)

Board Member Hood, thank you for your leadership in the credit union movement. Thank you for the time we’ve spent together today. I hope this makes a difference in the credit union movement. Again, thanks so much for your leadership.

Board Member Hood  (41:26)

You’re welcome. Thank you for having me today.

Doug English (41:29)

Thank you for listening in to our conversation with NCUA Board Member Rodney Hood. Rodney has been gracious enough to come back with an air date in August, answering questions from credit union leaders about his new Office of Innovation and Access at the NCUA. We’ll be sending out questions on social media, looking to gather questions from folks in the credit union movement and get those answered for you and broadcast in August 2023. 

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YouTube: https://youtu.be/v1g39v0xOOY

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