WASHINGTON - The National Association of State Treasurers is urging Congress to pass legislation defining readily tradeable, investment-grade municipal securities as high-quality liquid assets under federal banking rules that the market has complained constrain banks' appetite for munis.

NAST sent a letter to congressional leaders in both the House and Senate urging support of companion bills H.R. 1624, sponsored by Rep. Luke Messer, R-Ind., and S. 828, sponsored by Sen Mike Rounds, R-S.D. The bills would require the regulators to treat munis that are investment grade and actively traded in the secondary market as level 2B HQLA.

The measures are a response to rules adopted by the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. in 2014. These rules 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 HQLA to total net cash outflows – to deal with periods of financial stress.

Messer’s bill passed the House with solid bipartisan support late last year. The Senate bill was incorporated into a sweeping bank deregulatory bill passed by the Senate earlier this month.

The NAST letter said that passing the HQLA bills would help issuers finance critical infrastructure needs at lower cost by increasing muni demand from banks who would no longer be as limited in how much muni debt they could hold.

Utah Treasurer David Damschen
Utah treasurer David Damschen said NAST members recognize the quality of municipal debt and feel it was misclassified by 2014 banking rules.

“As currently constituted, the Liquidity Coverage Ratio Rule adopted by federal banking regulators excludes municipal securities as HQLA, which dampens banks’ demand for investment grade municipal securities, ultimately increasing the rates at which issuers of those securities can borrow, particularly in times of economic stress,” NAST president Beth Pearce of Vermont and senior vice president David Damschen of Utah wrote. “We believe that the rule overlooked a number of key attributes of municipal securities, including their limited price volatility and the depth and stability of the markets from which they are funded.”

Damschen told The Bond Buyer that NAST supports passing the provision whether via a banking bill or stand-alone legislation. He said the letter to congressional leaders focused on the stand-alone bills because the bank deregulatory legislation contains many other provisions unrelated to munis or HQLA.

“We’re trying to keep a narrow focus,” said Damschen.

It is unclear whether the Senate bank regulatory bill that includes HQLA provisions will make it through Congress.

After the Senate bill was passed, lobbyists said they thought the House would take it up and pass it within a few weeks. But House Financial Services Committee chairman Rep. Jeb Hensarling, R-Texas, subsequently said that the House would not pass the Senate bill without the addition of more provisions rolling back Dodd-Frank Act restrictions. Hensarling enjoys wide discretion over the committee's agenda and therefore over the future of the bank deregulation legislation.

But a congressional aide told The Bond Buyer that the House will likely eventually vote on the Senate bill, even over Hensarling’s objection.

“He has no leverage and no ability to change it,” said the aide, who requested anonymity in order to speak. “That cake has largely been baked.”

Bank lobbyists will put intense pressure on House Republicans to get something passed, the aide said, and any effort to monkey with the existing bill could threaten to torpedo the support of moderate Democrats, several of whom joined Republicans in voting for the bill in the Senate. Eventually, the Republican leadership will bring the Senate bill to the floor for a vote, the aide said.

Damschen noted that legislation originally introduced in the House would have classified some munis as level 2A HQLA, the same level as sovereign debt. Damschen said NAST believes that at least some munis clearly should be 2A HQLA. But issuers have nonetheless come together to support the legislation making them 2B HQLA, the same level as mortgage-backed securities.

Damschen was upbeat about the level of support among lawmakers.

“We’re appreciative that Congress is moving in this direction,” he said. “There is strong bipartisan support for this.”

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