House Committee Approves Bill to Treat Munis as HQLA

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WASHINGTON – The House Financial Services Committee approved a bipartisan bill by voice vote on Tuesday that would treat investment grade and actively traded municipal securities as high quality liquid assets under a bank liquidity rule adopted by banking regulators in September of last year.

A roll call on the vote was requested and approved, but postponed following the voice vote. The bill will now go to the House floor.

Rep. Luke Messer, R-Ind., who authored the bill, said the bill is a "commonsense fix to an arbitrary decision by federal regulators" to not include munis as HQLA. He introduced the bill on May 1.

"It makes no sense to increase borrowing costs with arbitrary borrowing burdens that ignore the realities of these safe investments," Messer said during the committee meeting.

The current rule, which banks will have to comply with by Jan. 1, 2017, 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 coverage 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.

When the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. first adopted the rule, they did not include munis as HQLA because of concerns they are not liquid or easily marketable.

Following industry complaints and requests for reconsideration, the Fed proposed amendments in May that would allow a limited number of munis to be treated as HQLA as long as they are, at 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 dealer groups said the Fed's unilateral proposal was a welcome attempt, but still restrictive. They said that without agreement from the FDIC and OCC, which regulate the majority of larger institutions, the Fed's proposed rule changes would ultimately be too narrow to be effective.

Messer agreed with the dealer groups in warning the Fed proposal "severely limits the scope of securities that would be included" under the classification and, without OCC or the FDIC, would risk "a bifurcated, confusing regulatory structure."

His bill would go farther by treating munis that are investment grade and actively traded in the secondary market as Level 2A assets, the same level as some sovereign debt and debt of U.S. government entities like Fannie Mae and Freddie Mac. It would apply to all bank regulators and allow for munis to account for up to 40% of a bank's HQLA.

Rep. Carolyn Maloney, a New York Democrat and co-sponsor of the bill, welcomed it as an answer to the current rule, which she said "effectively discriminates against municipal bonds." She added it would "level the playing field" for cities and states and allow municipalities to finance infrastructure at more reasonable rates.

Two Republican committee members, Bruce Poliquin of Maine and Randy Hultgren of Illinois, echoed Maloney, arguing the bill is necessary to keep borrowing costs and difficulties at a minimum for cities and states.

Poliquin also said the bill helps banks by giving them a more diversified portfolio.

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