GFOA Urges Members To Lobby Senators for HQLA Bill Sponsor

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WASHINGTON – The Government Finance Officers Association is urging its members to write senators about the need to get companion legislation to a House bill that would classify investment-grade municipal securities as high quality liquid assets under a rule by written by bank regulators.

The Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Depository Insurance Corp. all approved a rule in late 2014 that will require 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 coverage ratio – the amount of high quality liquid assets (HQLA) to total net outflows – to deal with periods of financial stress. The rule is scheduled to take effect on Jan. 1, 2017.

Assets are considered HQLA if they can easily be converted into cash with no loss of value during a period of liquidity stress. The bank regulators claimed that munis did not qualify because of concerns they were not liquid or easily marketable.

GFOA's draft letter and the accompanying alert posted on its site are the most recent in a series of efforts from the group to get munis included as HQLA. The alert specifically mentions Senate Banking Committee members as important potential allies for the legislation but adds that all interested issuers should send letters to their senators asking them to sign on to a future bill as co-sponsors.

Muni market participants' reactions to the rule led the Fed to slightly ease its rule for munis. But the market participants felt the Fed didn't go far enough and the other bank regulators still weren't considering munis as HQLA.

Rep. Luke Messer, R-Ind., introduced a bill, which passed the House in early February, that would allow for more municipal securities to be included than the Fed amendments.

The text of GFOA's draft letter encourages the group's members to tell their senators that a companion bill to Messer's is needed in the Senate because not having munis be treated as HQLA under what the letter text calls a "shortsighted" rule will increase borrowing costs for issuers and hurt their ability to finance much-needed public infrastructure projects.

"Banks will likely demand higher interest rates on yields on the purchase of our bonds during times of national economic stress, or even forgo the purchase of our securities during these times," the draft text says. "The resulting cost impacts for us could be significant, as bank holdings of municipal securities and loans have increased dramatically over the past five years."

The draft letter also includes a section for each issuer to list the total estimated amount of its 10-year capital improvement plan and explain several of its highest priority projects.

Sens. Chuck Schumer, D-N.Y., Mike Rounds, R-S.D., and Mark Warner, D-Va., each of whom sit on the Banking Committee, were rumored to be interested in introducing a companion bill soon after Messer's bill passed the House.

Messer's bill would treat munis that are investment grade and readily marketable in the secondary market as Level 2A assets under the banking rule, the same level as some sovereign debt and government-sponsored debt of Fannie Mae and Freddie Mac. Munis could account for up to 40% of a bank's HQLA under the bill.

The Fed's amendments would allow munis to be treated as HQLA as long as they are, at a minimum, uninsured investment grade general obligation bonds. Munis that qualify for the designation would be classified as Level 2B assets, the same as corporate bonds that are liquid and readily marketable, but could only make up 5% of a bank's HQLA.

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