WASHINGTON – The House late Monday passed a bill that would treat investment grade and readily marketable municipal securities as high quality liquid assets under a liquidity rule banking regulators adopted in 2014. The Senate is expected to begin considering a companion bill in the near future.
The bill, introduced by Rep. Luke Messer, R-Ind., passed by a voice vote in the House after being approved by a vote of 56 to 1 in the House Financial Services Committee in November. The Financial Services Committee said in a release following the House vote that the bill "allows banks to use highly rated municipal bonds to help satisfy new regulations that threaten to stop the flow of funding for infrastructure projects like roads, bridges, and schools."
"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," Messer said in a release following the bill's passage. "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."
Sens. Chuck Schumer, D-N.Y., Mike Rounds, R-S.D., and Mark Warner, D-Va., have each shown interest in introducing a companion bill in the Senate, sources said. If a bill is introduced and passed in the Senate, the House and Senate would hold a conference to align their respective legislation before sending it to the president for approval.
The Messer bill would treat munis that are investment grade and readily marketable in the secondary market as Level 2A assets under the liquidity rule, the same level as some sovereign debt and government-sponsored debt of Fannie Mae and Freddie Mac. Munis could also account for up to 40% of a bank's HQLA.
The Federal Reserve Board, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. all developed the stricter existing rules and have mandated banks comply with it by Jan. 1, 2017. The rule requires banks with at least $250 billion of total assets or consolidated on-balance sheet foreign exposures of at least $10 billion to have a high enough liquidity ratio – the amount of HQLA to total net cash outflows – to deal with periods of financial stress. Assets are considered HQLA if they can easily be converted into cash with no loss of value during a period of liquidity stress. Munis would not be considered as HQLA under the existing bank liquidity rules.
The Fed, responding to complaints from muni groups, proposed amendments in May that would allow a limited number of munis to be treated as HQLA as long as they are, at a minimum, uninsured investment grade general obligation bonds. The bonds would be considered Level 2B, the same as corporate bonds that are liquid and readily marketable, but could only make up 5% of a bank's HQLA.
Muni groups have welcomed Messer's bill and supported the Fed's decision to propose the amendments. But Messer's bill carries more weight than the Fed proposal because the Fed only regulates a small number of institutions while the FDIC and OCC, which have not pursued the Fed's amendments, regulate the majority of larger institutions.
