WASHINGTON — Three House members are pushing bank regulators to amend their liquidity rule to include investment grade municipal securities as high-quality liquid assets.
Reps. Michael Capuano, D-Mass., James McGovern, D-Mass., and Gwen Moore, D-Wisc., made the push in a one-page letter to Janet Yellen, chair of the Federal Reserve Board chair, Thomas Curry, chair of the Office of the Comptroller of the Currency, and Martin Gruenberg, chair of the Federal Deposit Insurance Corp.
Their letter follows similar but longer ones from the Securities Industry and Financial Markets Association, eight state and local groups and Sen. Chuck Schumer, D-N.Y. Banking regulators have said they are conducting research to justify some munis as HQLAs. SIFMA has suggested that the investment grade bonds of issuers and obligors with at least $100 million of marketable securities outstanding should qualify as HQLA.
The three House members said that it "is unacceptable" not to include investment grade munis as HQLA.
"It will only increase municipal borrowing costs, limit the number of financial institutions willing to invest in municipal securities, and obstruct state and local governments' capacity to provide essential services — clean water, transportation infrastructure, hospitals, schools — that we rely on," they said.
"Investment grade municipal securities are just as liquid as these other securities and their default rate is virtually zero, far lower than any of the approved securities," they said, adding, "The "Federal Reserve has even acknowledged as much."
"We trust that any rule will be amended quickly to include investment grade municipal securities and avoid any negative impact to the municipal bond market," they said.
The liquidity rule applies to U.S. banking and other financial institutions with at least $250 billion of total assets on consolidated on-balance sheet foreign exposures of at least $10 billion. It would require these institutions to maintain a minimum liquidity coverage ratio, defined as the ratio of HQLA to total net cash outflows. Assets would qualify as HQLA if they could be easily and immediately convertible to cash with little or no loss of value during a period of liquidity stress.
