WASHINGTON — Bond Dealers of America and the U.S. Chamber of Commerce warned lawmakers Thursday that the so-called Volcker Rule could restrict liquidity in the muni bond market and raise issuers’ costs.

In written testimony submitted to the House Financial Services Committee, BDA said the rule, which restricts proprietary trading by banks, should exempt all municipal bonds, including those issued by agencies and authorities such as turnpike agencies and water and sewer districts.

The rule already exempts bonds issued by state and local governments.

Agency and authority bonds, the BDA said, represent 60% of the muni market and do not have more credit or systemic risk than state and local government bonds, BDA said.

The rule would “interfere with the ability of broker-dealers to bridge gaps between buyers and sellers, immediately removing liquidity from the market that is necessary to keep issuance costs low and valuations stable,” wrote BDA.

The testimony was submitted because the committee held a hearing Thursday about potential impacts of the rule on markets, businesses, investors and job creation.

The rule is being finalized by five agencies: The Federal Reserve Board, the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Securities and Exchange Commission and the Commodity Futures Trading Commission.

Federal Reserve Chairman Ben Bernanke said Wednesday that the rule will likely be released early next year.

Rep. Barney Frank, D-Mass., speaking during what is likely his last hearing of the committee, said concerns about the rule have been overstated.

In a couple of years it will be clear “how unfounded all of these dire predictions have been,” he said.

Dennis M. Kelleher, head of financial advocacy group Better Markets, told lawmakers the rule is necessary to ensure that taxpayers are protected from proprietary trading losses at country’s largest banks.

Proprietary trading by banks backed by taxpayers is “nothing more than gambling,” he said. “Banks get the upside of the betting, and the taxpayer gets the downside.”

Written testimony submitted by the U.S. Chamber of Commerce said the rule could prohibit banks, when underwriting, from holding bonds in inventory while they line up customers. Those banks may delay underwriting bonds until buyers are found in advance, the Chamber said.

“Imagine a municipality or a hospital facing a critical funding need. Under the Volcker rule, they may go bankrupt waiting for a bank to line up the funding. Or, they would end up paying a crippling rate,” the Chamber wrote in its testimony.

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