House Passes Legislation to Classify Muni Bonds as High-Quality Liquid Assets

The U.S. House of Representatives yesterday passed via voice vote legislation (H.R. 1624) that would allow large banks to count some of their municipal bond investments as high-quality liquid assets (HQLAs) under federal bank liquidity standards. The legislation, which NCSHA supports, was introduced by Representatives Luke Messer (R-IN) and Carolyn Maloney (D-NY).

H.R. 1624 would modify a regulation the Federal Reserve, Department of Treasury, and Federal Deposit Insurance Corporation (FDIC) released in October 2014 to ensure that large banks hold enough liquidity to continue making payments during periods of financial stress. Under this final rule, banks with at least $250 billion in assets (or $10 billion in foreign exposure on their balance sheet) must maintain a minimum liquidity coverage ratio (LCR) comprised of certain financial investments that are considered HQLAs. The rule went into effect at the beginning of 2017.

Despite the urging of NCSHA and other advocates, the agencies did not include municipal bonds as HQLAs in the final rule. This means that large banks cannot currently use any municipal bond investments they hold toward meeting their LCR. H.R. 1624 would require that all investment-grade municipal bonds, including private activity Housing Bonds, which are "liquid and readily marketable" be classified as level 2B HQLAs. This would allow banks to count such municipal bonds towards their LCR, but only at a value that is 50 percent below each investment’s market value. In addition, banks cannot use level 2 assets to account for more than 40 percent of their HQLAs.

H.R. 1624 initially would have classified as municipal bonds as level 2A HQLAs, which would have a required only a 15 percent haircut in asset value. The House Financial Services Committee amended the legislation to classify municipal bonds as level 2B HQLAs after the Treasury Department released a report in June recommending that municipal bond investments receive the level 2B designation. The Committee favorably reported the legislation by a unanimous vote of 60-0.

H.R. 1624 will now be sent to the Senate for consideration, where identical legislation (S. 828) has been introduced by Senators Mike Rounds (R-SD) and Mark Warner (D-VA).