Chalk up a win for the municipal bond market, local infrastructure projects and individual investors.

Under new legislation passed by Congress, investment-grade municipal bonds will be considered high quality liquid assets, which banks can hold to satisfy liquidity rules.

Public finance officials across the country applauded the measure.

“As state treasurers, we recognize that modern, safe and reliable infrastructure is essential to the growth of our communities and we strive to finance those public infrastructure project at the lowest possible cost to taxpayers,” said Beth Pearce, the Vermont state treasurer and president of the National Association of State Treasurers.

Reversal On Bank Liquidity Rule A Win For Muni Bonds

The change to the banking rules earlier this week was part of a bill that also rolls back some provisions of the 2010 Dodd-Frank Act, which made significant changes to the nation’s banking system.

 

HQLA rule failed to include munis

Originally issued in 2014, the banking liquidity rules were enacted as a response to the financial crisis of 2008. They required banks to hold enough liquid assets to withstand periods of financial stress and did not include municipal bonds as high quality liquid assets.

Since the high quality liquid asset rules were first contemplated, they drew immediate backlash from state and local budget officials, investors and others, who noted the safety and stability of munis.

Large banking institutions have traditionally held significant municipal bond holdings. By excluding munis from the liquidity rule, market participants feared these institutions would become less active in the market. The result would be reduced competitive pricing for investors, ultimately causing the tax-free bond market to become less liquid.

Local officials, mindful that the rules would make public projects more costly, pushed back and applauded the new legislation.

“This change would make municipal debt more attractive to investors and banks, keeping the demand for municipal bonds high and interest costs of issuance low for counties and other issuers,” the National Association of Counties said.

Rebuilding the nation’s infrastructure is sorely needed, and we’re baffled when financial tools integral to these projects are handcuffed. The legislation including munis as high quality liquid assets is a good start. We hope efforts to revive advance refunding bonds are equally successful.

James A. Klotz is the President of FMSbonds, Inc. Email the Author 05/25/2018