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Senators Introduce Bill to Classify Municipal Bonds as High-Quality Liquid Assets

Published on September 29, 2016 by Greg Zagorski
Senators Introduce Bill to Classify Municipal Bonds as High-Quality Liquid Assets

Earlier this week, a bipartisan group of Senators introduced legislation (S. 3404) that would allow large banks to count some of their municipal bond investments as high-quality liquid assets under federal bank liquidity standards. The bill is sponsored by Senator Mike Rounds (R-SD), who introduced it with Senators Mark Warner (D-VA) and Chuck Schumer (D-NY). All three are members of the Senate Banking Committee. Other cosponsors include Jon Tester (D-MT), Mark Kirk (R-IL), Heidi Heitkamp (D-ND), Tim Scott (R-SC), Joe Donnelly (D-IN), Jerry Moran (R-KS), and David Vitter (R-LA). NCSHA joined several organizations, including the National Governors Association, Government Finance Officers Association, and National Association of State Auditors, Comptrollers and Treasurers, to co-sponsor this bill.

S. 3404 would modify a regulation promulgated by the Federal Reserve, the Department of Treasury, and the Federal Deposit Insurance Corporation (FDIC). The regulation, set to take effect in January 2017, would ensure that large banks hold enough liquid assets to continue making payments during periods of financial stress. Under the 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 “High-Quality Liquid Assets” (HQLAs).

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 currently cannot use any municipal bond investments they hold towards meeting their LCR. The Federal Reserve has since amended its LCR standards to allow some municipal bonds to be considered as HQLA, but only uninsured general obligation bonds. This means that housing bonds and other private-activity bonds are still not considered HQLAs. Further, because the Federal Reserve issued this proposed rule unilaterally instead of jointly with Treasury and the FDIC, it only applies to the large banks the Federal Reserve oversees.

Under S. 3404, municipal bonds would be eligible to count as HQLAs, but only under a classification, called “2B,” that requires banks to count only half of their value toward their liquidity buffers. This is the same classification that applies to highly-rated corporate bonds.

S. 3404 has been referred to the Senate Banking Committee. Earlier this year, the House of Representatives passed similar legislation (H.R. 2209) via voice vote. The House-passed bill has also been referred to the Banking Committee.