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House Introduces Legislation to Classify Municipal Securities as High Quality Liquid Assets

GFOA News Letter  March 23, 2017

This week HQLA Champion Congressman Luke Messer (R-IN-6) has introduced bipartisan legislation (HR 1624) in response to a rule approved by the Federal Reserve Board, Federal Depository Insurance Commission, and the Comptroller of Currency in September 2014, which established new liquidity standards for banks. The new standards, which went into effect in January 2015, require financial institutions with at least $250 billion in total assets to maintain prescribed levels of liquid assets that can quickly be converted into cash in times of national economic stress. These asset classes included foreign sovereign debt, but failed to classify municipal securities as high quality liquid assets (HQLA).

In the last Congress, the House voted by unanimous consent to approve bipartisan legislation identical to this legislation that would require federal regulators to classify all investment-grade, liquid, and readily marketable municipal securities as HQLA. However, the legislation stalled in the Senate.

Not classifying municipal securities as HQLA will increase borrowing costs for state and local governments to finance public infrastructure projects, as banks will likely demand higher interest rates on yields on the purchase of municipal bonds during times of national economic stress or even forgo the purchase of municipal securities. Congressman Messer’s legislation would protect municipal securities issuers from such cost increases by directing the Federal Reserve, FDIC, and OCC to admit municipal securities into accepted HQLA classes outlined under last September’s rule.

GFOA appreciates Messer’s leadership on this important issue and will engage GFOA members in the coming weeks in the advocacy effort to advance consideration of this legislation in the House this summer.

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