WASHINGTON – Municipal issuer groups are urging members in both chambers of Congress to support legislation that they say would help the economy and infrastructure by including investment-grade, liquid municipal securities as high-quality liquid assets under banking regulations.
The fifteen groups made their requests in joint letters to the Senate Banking Committee’s leadership and each representative in the House.
The letter to the Senate Banking Committee chair Mike Crapo, R-Idaho, and top Democrat on the panel Sherrod Brown, D-Ohio, is a response to that committee’s March request for proposals to foster economic growth.
The letter to the House members aims to add co-sponsors to the bipartisan legislation (H.R. 1624) introduced by Reps. Luke Messer, R-Ind., and Carolyn Maloney, D-N.Y. The legislation in the Senate (S. 828) is also bipartisan. It was offered by Sens. Mike Rounds, R-S.D., and Mark Warner, D-Va., and has the support of Senate Minority Leader Chuck Schumer, D-N.Y., among others.
Neither bill has moved beyond committees since being introduced.
“Together our members agree that legislation classifying municipal securities as high-quality liquid assets would keep demand for the municipal bond high, thus keeping the interest costs of issuance low,” the groups said in their letter to the Senate committee. “Keeping interest costs low, especially during times of fiscal stress, translates to more flexibility in providing and maintaining infrastructure across the United States.”
Munis “not only provide a higher quality of life to individuals in communities across the United States, they also provide jobs and keep local economies strong,” they added.
“With the American Society of Civil Engineers estimating a $2.1 trillion funding gap in ten years to meet our nation’s infrastructure needs, the ability of states and localities to finance infrastructure at the lowest possible cost is critical,” the groups wrote.
The bills respond to a rule adopted by the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. in 2014. The rule 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.
Bank regulators did not include munis as HQLA under the rule because they felt the securities were not liquid enough. Dealers and issuers challenged that conclusion, saying the choice to exclude munis would increase borrowing costs for state and local governments and lead to higher volatility in the municipal market.
The concerns from municipal market participants spurred the Federal Reserve Board to act in April 2016 by revising its rule to count munis as level 2B HQLA assets if they meet the same liquidity criteria that applies to corporate debt. However, market participants felt the change was too restrictive because of the 15% limit on level 2B assets and further restrictions like keeping munis to at most 5% of total HQLA. There was also concern that the rule would be too limited because the Fed lacks jurisdiction over many of the larger banks that may be investing in munis.
The proposed bill in the Senate attempts to address those concerns by requiring bank regulators to treat munis that are investment grade, liquid, and readily marketable as level 2B HQLA. Level 2B is the lowest level of HQLA and also includes corporate debt and publicly traded common stock. The banking regulators’ rule requires that level 2B assets make up no more than 15% of a bank’s HQLA.
The bill in the House goes even further by treating munis that are investment grade, liquid, and readily marketable as level 2A HQLA. Level 2A also includes debt from U.S. government-sponsored enterprises like Fannie Mae and Freddie Mac as well as foreign sovereign debt. Assets at the 2A level can make up as much as 40% of a bank’s HQLA.