Municipal bonds get boost in Senate financial services bill

The Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which reclassifies municipal debt as a High-Quality Liquid Asset 

Legislation passed by the Senate March 14 would make municipal debt more attractive to investors and banks, keeping the demand for municipal bonds high and interest costs of issuance low for counties and other municipal issuers. 

The Economic Growth, Regulatory Relief, and Consumer Protection Act, S. 2155, which passed by a 67 to 31 vote, includes many financial services provisions; Section 403 in particular is beneficial to counties, as it would reclassify municipal debt as a High-Quality Liquid Asset (HQLA).

Tax-exempt municipal bonds are used to finance construction of or repairs to a variety of infrastructure projects important to counties, including roads and bridges; public transportation; seaports and airports; water and wastewater facilities; acute care hospitals; and electric power and natural gas facilities. Classifying investment grade municipal securities as HQLA will help ensure low-cost infrastructure financing remains available as municipal issuers continue building the local infrastructure on which our communities and the national economy rely.

Under Dodd-Frank, banks must meet a Liquidity Coverage Ratio (LCR) to ensure each bank has enough liquid assets should there be a time of financial stress. Part of this LCR includes HQLAs, which comprise two levels of assets, 2A and 2B. Level 2B assets must account for at least 15 percent of a bank’s total stock. By classifying municipal securities as a Level 2B asset, banks will be further incentivized to invest in these financing tools.

Following passage in the Senate, Congress has at least two options for sending a final bill to the president’s desk. First, the House could simply vote on and pass the language approved by the Senate. However, House Financial Services Committee Chairman Jeb Hensarling (R-Texas) has already indicated he and other House members plan to make changes to the Senate’s version. It is still unclear whether the changes made by the House will impact Section 403, more specifically the reclassification of municipal debt as HQLA.

If the House does pass an amended version, the bill would be sent back to the Senate, putting the ball back in the upper chamber’s court.