Comments Filed on Proposal to Eliminate Muni Bond Eligibility as High Quality Liquid Asset (HQLA)

The Fed, OCC and FDIC have recently proposed implementing a new liquidity requirement for banks consistent with the Basel III Committee’s liquidity coverage ratio standard.  In their proposal, they entirely exclude munis from qualifying as HQLA, the effect of which would be to dampen demand by commercial banks and consequently, raise borrowing costs for issuers.

BDA has filed comments, available here, stating:

  • Given the strong performance of highly-rated municipal bonds in times of market stress and the tools available to evaluate liquidity, the agencies should reconsider their proposal to set aside municipal securities rather than include them for potential HQLA classification.
  • The ramifications of setting munis aside are significant, including needlessly increasing borrowing costs for state and local governments.
  • The proposed rulemaking gives a cursory dismissal of the marketability of securities that are the building block of U.S. infrastructure and for which there is strong demand from investors seeking a stable and well-understood form of domestic investment.
  • Municipal bonds merit examination for potential HQLA qualification, just as foreign sovereign state obligations can be determined to meet the HQLA criteria.

Also of interest were comments submitted by the issuers community under the umbrella of the Public Finance Network, available [here].