The Basel Committee on Banking Supervision released revisions to the liquidity-coverage ratio requirement included in Basel III Jan. 6, and Moody's Investors Service called them a positive for certain issuers.

"These revisions are credit positive for municipal issuers of variable-rate demand bonds (VRDBs) and similar securities because they will not likely result in banks increasing the cost or limiting the availability of credit facilities as much as what would have likely occurred under the committee's previous plan," analysts wrote in a report released Monday.

The current municipal VRDB market totals approximately $265 billion.

The main changes to the liquidity coverage ratio, or LCR, include a significant reduction of the assumed percentage of liquidity commitments, an expansion of the definition of high-quality liquid assets, and an extension of the schedule of the LCR requirement implementation.

The LCR is a requirement to ensure that banks have enough high-quality liquid assets that can be converted to cash in order to meet a percentage of the liquidity commitments that could be drawn within 30 days.

The original requirement was that banks assume 100% draws on the liquidity facilities and lines of credit, but the new requirement assumes only 30% draws of all facilities extended to non-financial corporations, sovereigns and other public sector enterprises.

The new requirement will be eased in through phases, starting at 60% of the full amount on Jan. 1, 2015, and increasing in 10-percentage-point increments until it's fully implemented by Jan. 1, 2019. The original requirement was to be fully implemented by 2015.

Under the committee's other main change, the definition of high-quality liquid assets now includes investment-grade corporate bonds subject to a 50% haircut, unencumbered equities subject to a 50% haircut, and certain residential mortgage-backed securities rated Aa2 or higher subject to a 25% haircut.

The aggregate amount of assets in these categories, after haircuts, cannot exceed 15% of the total liquidity-coverage ratio requirement.

These changes will significantly lower the cost of compliance, according to Moody's analysts. By 2015, costs associated with compliance will be phased in and reduced to 30% of what they would have been as of Jan. 1, 2019. Using higher yielding assets or bank assets, such as corporate bonds and equities, could reduce the cost even further.

"Some banks have been reluctant to provide support facilities for municipal VRDBs in anticipation of the LCR requirement," Moody's analysts said.

However, they added, "at these lower LCR requirements, some banks are likely to resume providing support facilities for municipal VRDBs, which would help lower the related costs to municipal issuers."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.