High-Quality Liquid Assets Should Include Muni Bonds, Lawmakers Say

 
 
 
By Rob Tricchinelli 
 
 
A pair of Democratic lawmakers May 28 asked federal regulators to reconsider their proposed rule keeping municipal bonds from being considered “high-quality liquid assets” as part of a larger capital standards rule regime.
 
“The municipal securities market includes numerous securities that share the key characteristics of other HQLA qualified securities,” Reps. Gwen Moore (D-Wis.) and Terri Sewell (D-Ala.) said in a comment letter. “Furthermore, such municipal securities would provide additional diversity to the investment categories, which should decrease systemic risk.”
 
Last year, the Federal Reserve Board and Federal Deposit Insurance Corporation joined the Office of the Comptroller of the Currency's rule proposal that would adopt international standards for banks to have enough assets on hand that could be liquidated in a crisis—so-called high-quality liquid assets. Under the proposed rule, municipal bonds would not qualify as HQLAs.
 
The agencies could finalize their rules this summer. As proposed, banks would need to be 80% compliant by Jan. 1, 2015; 90% compliant by Jan. 1, 2016; and 100% compliant by Jan. 1, 2017.
 
 
Agency Cooperation
 
Moore and Sewell said that the banking regulators should work with the Securities and Exchange Commission and the Municipal Securities Rulemaking Board, “the primary regulators of municipal bonds,” to tweak the rule and reclassify those bonds and HQLAs.
 
During the financial crisis, municipal bonds “exhibited greater price stability than comparably rated corporate bonds,” presumably because of their “low default rate,” wrote Moore and Sewell, both members of the House Financial Services Committee.
 
While the agencies' proposed rules are similar to those proposed in the Basel III accord, they have a narrower scope of permissible assets.
 
Banking groups say the rules would put them at a disadvantage on the global stage.
 
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