House bill would classify municipal securities as high-quality liquid assets

Bill to reclassify municipal securities could mean higher borrowing costs for county governments 

On Feb. 1, the House passed legislation, H.R. 2209, that would require federal financial regulators to classify municipal securities as high quality liquid assets (HQLA). Such a move could forestall higher borrowing costs for county governments.

In 2014, the Obama Administration finalized the Liquidity Coverage Ratio rule, which requires large banks to carry a certain percentage of their assets as liquid assets and identifies acceptable investments, known as HQLAs, which banks may hold to meet this requirement.

In response to the 2007-2008 financial crisis, the rule was designed to prevent major bank failures by ensuring that banks have sufficient funds readily available to cover their obligations during an economic crisis.

However, the rule excludes investment grade municipal securities from its definition of HQLAs.

Since the rule was published, NACo has worked in coalition with other public finance stakeholders to engage the administration and Congress to amend the rule.

Most recently, NACo joined a coalition letter sent to the House urging passage of H.R. 2209.

In the letter, coalition members state that failing to classify municipal securities as HQLA would increase borrowing costs for states and local governments because banks would demand higher interest rates on the purchase of municipal bonds, particularly during economic downturns; banks may even forego the purchase of municipal securities altogether.

Efforts now turn to the Senate, where a companion bill is expected to be introduced.

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For more information, contact Mike Belarmino, associate legislative director, mbellarmino@naco.org.