WASHINGTON – President Donald Trump’s signature Thursday officially codified into law a banking bill that requires banking regulators to classify tradable, investment-grade municipal securities as high-quality liquid assets under bank liquidity rules, which market participants hope encourages banks to buy more municipal debt.

Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act less than two full days after its passage in the House on Tuesday.

The bill modifies Liquidity Coverage Ratio 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.

Donald Trump
Donald Trump signed the banking bill into law Thursday. Bloomberg

All of the bank regulators had excluded munis as HQLA in the LCR rules. The Fed later revised its rules, but its muni HQLA provisions were seen as too restrictive and they wouldn't have applied to many banks. The new law makes investment-grade munis Level 2B, the same level as for mortgage-backed securities.

Muni groups had touted the victory earlier this week, though the Bond Dealers of America also said it would keep pushing to have munis classified as an even stronger level of HQLA that would make it attractive for banks to hold even more of them under the LCR rules.

The new law also features various rollbacks of Dodd-Frank Act provisions, such as exempting from the Volcker Rule firms with less than $10 billion in assets and with total trading assets and liabilities not exceeding more than five percent of their total. The Volcker Rule is aimed at prohibiting banks from making certain kinds of speculative investments that could harm their customers. Those provisions have drawn criticism from the political left, but conservatives and industry groups applauded them.

In signing the bill, Trump highlighted the reduced regulatory burden on smaller banks. “Community banks are the backbone of small business in America,” said Trump. “We are going to preserve our community banks.”

The National Association of State Treasurers lauded the new law, focusing on how the HQLA provision in the new law will help states fund infrastructure in a more affordable way.

“The National Association of State Treasurers applauds the codifying of this important provision that makes it easier for states to fund vital infrastructure projects and improvements across the nation,” said Beth Pearce, NAST president and Vermont State treasurer. “As state treasurers, we recognize that modern, safe and reliable infrastructure is essential to the growth of our communities and we strive to finance those public infrastructure projects at the lowest possible cost to taxpayers. This provision will accomplish just that – and we are grateful that our elected leaders recognized the importance of these projects by taking swift action to pass and sign this bipartisan legislation that will benefit all Americans.”

President Donald Trump signed the banking bill Thursday.
President Donald Trump signed the banking bill Thursday. Bloomberg News

The American Bankers Association thanked the president and said it wants to work with the government to make further improvements to regulation going forward.

"Today’s signing ceremony concludes years of dedicated advocacy by ABA members across the country who showed that some of the rules in place were hurting not helping the country,” said Rob Nichols, the group's president and CEO. “House and Senate lawmakers from both parties listened to what we and others had to say and delivered this victory for both their constituents and the broader economy. We believe there is more that can and should be done to rightsize financial rules while maintaining needed safety and soundness, and we look forward to working with members of Congress, the regulatory agencies and the administration to achieve more progress in the months ahead.”

Now that the bill is law, the banking regulators will have to adjust their rules – a process market groups have expressed a desire to play a role in.

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