The House passed a bill that would treat municipal bonds as “high-quality liquid assets” under new banking rules.
A companion bill is expected to be introduced soon in the Senate.
Rules initially excluded munis
The bill was designed to change a rule enacted in 2014 covering large banks.
Proposed in response to the fiscal emergency of 2008, when financial markets froze due to a lack of liquidity, the rule requires these banks to hold enough liquid assets to fund their operations for 30 days if other sources of funding aren’t available.
While foreign sovereign debt securities were considered “high-quality liquid assets” (HQLA) under the rule, investment-grade municipal bonds were not and therefore couldn’t count toward satisfying the requirement.
The exclusion of munis sparked a widespread, bipartisan effort to change the rule.
The House bill was passed by a voice vote last week after it was overwhelmingly approved by the Financial Services Committee.
“If our local leaders decide it’s important to build a new school, hospital, bridge or road for their residents, a federal regulatory misstep shouldn’t stand in their way,” said Rep. Luke Messer, co-sponsor of the bill.
“This bill helps ensure cash-strapped school districts and municipalities will continue to have access to bonds to finance projects they think are best for their communities.”
The liquidity rule was approved by the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
Banks have until Jan. 1, 2017, to comply.
Though the Fed proposed amendments last year that would include some munis, the FDIC and OCC, which regulate most large institutions, have not proposed similar changes.
Good for borrowers, investors
As we stated when the liquidity rules were first proposed (Push Is On To Include Munis In New Banking Rule), excluding munis would be detrimental to both issuers and investors.
Traditionally, large banking institutions have had significant municipal bond holdings.
Excluding munis would result in these institutions becoming less active in the market, resulting in reduced competitive pricing for investors, causing the tax-free bond market to become less liquid.
Ultimately, funding public projects would become more expensive and difficult.
We support the House bill and are hopeful a companion bill will be introduced in the Senate and, ultimately, passage of this bill into law.