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Liquidity Coverage Ratio Rule/HQLA Resource Center

GFOA Newsletter:  July 27, 2017

Urge Your Congressional Representatives to Classify Municipal Securities as High Quality Liquid Assets!

On July 25, 2017, the House Financial Services Committee approved HR 1624, bipartisan legislation that would require federal regulators to classify all investment grade municipal securities as high quality liquid assets (HQLA). This important legislation is necessary to amend the liquidity coverage ratio rule approved by federal regulators in 2014, which classifies foreign sovereign debt securities as HQLA while excluding investment grade municipal securities in any of the acceptable investment categories for banks to meet new liquidity standards.

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. The resulting cost impacts for state and local governments could be significant, with bank holdings of municipal securities and loans having increased by 86% since 2009.

The next stop for HR 1624 is the House floor, but the date for its consideration has not been determined yet. GFOA is urging members to send letters to their congressional delegations urging support for this bill. A draft letter has been developed for your use which is available here. Please reach out to your House members today and urge them to support HR 2209.


In September of 2014 the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC) approved a rule establishing minimum liquidity requirements for large banking organizations. The liquidity coverage ratio rule was designed to ensure that large banks maintain liquid assets that can easily be converted to cash during times of national economic crisis. The rule identifies High Quality Liquid Assets (HQLA) to meet this requirement, but fails to include municipal securities in any of the acceptable investment categories (despite including foreign sovereign debt!).

Following approval of the new rule, the GFOA and our state and local association partners have urged the Federal Reserve, FDIC and OCC to amend the rule to classify investment-grade, liquid and readily marketable municipal securities as HQLA.  On May 21, 2015 the Federal Reserve Board issued a proposed rule that would designate certain investment grade municipal securities as HQLA. While the GFOA is extremely grateful for the Federal Reserve’s recognition of the liquidity features of municipal securities, we have some concerns with the proposal, which we raised in our comment letter. Such concerns include the proposal’s failure to include revenue bonds as HQLA, and its limit on the total amount of general obligation (GO) securities that a financial institution can hold to no more than 5 percent of the institution’s total amount of HQLA.

Meanwhile the FDIC and OCC refuse to modify the rule for municipal securities.  In the absence cooperation from the agencies, the GFOA is working with bipartisan champions in Congress to change the rule through legislation (HR 2209) and preserve low-cost infrastructure financing for state and local governments and public sector entities.

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