Municipal Market Advisors and the Securities Industry and Financial Markets Association say that a federal decision delaying implementation of Basel III standards for banks is a positive for U.S. municipal bonds.
In late October SIFMA filed three comment letters with federal authorities explaining how Basel III could curb banks’ holding of munis.
According to Federal Reserve data banks were the fastest growing holders of munis in the United States in the second half of 2011 and the first half of 2012, growing their holding by 22%.
“Taking additional time to understand the implications that the complex set of Basel III rules could have on banks and markets could lead to modifications that are more positive towards municipal securities,” wrote MMA managing director Lisa Washburn.
On Friday the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency announced that they were delaying the January 2013 implementation of some of Basel III’s rules. The regulators did not provide a new implementation timeline.
“The delay lessens the risk that banks, the fastest growing holders of municipal debt, will reduce their exposure to the market – at least in the short run,” Washburn wrote in the MMA Weekly Outlook.
“We think it’s appropriate for the regulators to delay implementation to work through the complicated issues,” said SIFMA managing director Michael Decker.
One problem with the current Basel III rules for munis is that they require banks to hold excessive capital to back municipal revenue bonds, Decker said. The current rules would also discourage banks from writing contracts for long-term municipal swaps, he said.