On February 1, the House of Representatives passed legislation, H.R. 2209, that would require federal financial regulators to classify municipal securities as high quality liquid assets (HQLA). This bipartisan bill was approved by the House Financial Services Committee on November 3, 2015 by a vote of 56-1.
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 HQLA, 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 HQLA. 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.
Failing to classify municipal securities as HQLA will increase borrowing costs for states and local governments, as banks will demand higher interest rates on the purchase of municipal bonds, particularly during economic downturns, or even forego the purchase of municipal securities altogether. Given that bank holdings of municipal securities have increased by 86 percent since 2009, the cost of inaction will be significant.
Efforts now turn to the Senate, where we expect a companion bill to be introduced. NACo encourages counties to urge their senators to support legislation to include municipal securities as an acceptable investment category for banks to meet the new liquidity standards.