New Federal Banking Rules Could Increase Borrowing Costs for State and Local Governments

Tuesday, August 26, 2014

Federal regulators are set to approve new liquidity standards on banks that could increase borrowing costs for state and local governments, according to reports from Bloomberg and other news outlets. The Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of Currency are scheduled to vote on September 3, 2014, on the new rules, which would require banks with at least $250 billion in assets to meet new liquidity requirements. The new rules are a response to the 2008 financial crisis and are aimed at ensuring that large banks are capable of funding their operations for 30 days during times of fiscal stress. Under the rules, banks that meet the total asset threshold must maintain designated levels of “high-quality liquid assets” – assets that can be easily converted to cash.  

Since the new rule was proposed in November 2013, the GFOA has led efforts with its state and local government and banking association partners to urge federal regulators to classify municipal securities as high-quality liquid assets (see the January 31, 2014, joint advocacy letter below). The GFOA has also engaged federal lawmakers to weigh in with regulators about the merit of including municipal securities as high-quality liquid assets, as well as the impact on state and local governments of failing to do so. Specifically, the GFOA is concerned that failure to qualify municipal bonds as high-quality liquid assets would reduce the appeal of municipal securities for banks and make them less likely to underwrite munis, which would increase state and local governments’ borrowing costs for financing desperately needed infrastructure projects. The cost could have significant effects on governments, as bank holdings of municipal securities and loans have increased by 86% since 2009.      

The GFOA is working with its state and local government and banking association partners on one last push to encourage federal regulators to include municipal securities as high-quality liquid assets and is urging its members to assist with this effort. Members are encouraged to contact the Board of Governors of the Federal Reserve, FDIC’s Board of Directors, and the the Comptroller of Currency using the information below and key points available below.

Please reach out to these regulators today!  

Board of Governors of Federal Reserve

  • Janet Yellen, Chair: (202) 452-3000; fax, (202) 452-3819
  • Stanley Fischer, Vice Chairman: (202) 452-3000; fax, (202) 452-3819
  • Daniel Tarullo
  • Jerome Powell
  • Lael Brainard: (202) 452-3217; fax, (202) 452-2730

FDIC Board of Directors

For additional information to share with regulators, please refer to the January 31, 2014, GFOA-led coalition letter; the June 3, 2014, multi-city letter; the January 29, 2014, City of New York letter; and the January 31, 2014m State of California letter, all below.  

Key Points to Make with Regulators on HQLA:

  • Please vote NO on this proposal on September 3!  
  • As federal resources to fund an estimated infrastructure investment gap of $3.6 trillion by 2020 have been reduced over the last five years, state and local governments, which are still recovering from the 2008 economic crisis, continue to play a leading role in financing our nation’s infrastructure through tax exempt bonds.    
  • The role of banks has been critical in supporting our investments in infrastructure, with bank holdings of municipal securities and loans having increased by 86% since 2009.  
  • Approval of this proposal will reduce demand from large banks for municipal securities, and in so doing increase borrowing costs to state and local governments.   
  • Governments faced with higher borrowing costs will be forced to delay much-needed infrastructure projects, or forgo them entirely. Both of these scenarios will produce negative local, regional, and national economic impacts.    
  • The characteristics of municipal securities are consistent with other investment categories (U.S. Treasuries, government agency obligations, investment-grade corporate bonds) that the proposal classifies at high-quality liquid assets.  
  • It is outrageous that the proposal characterizes foreign sovereign debt securities as high-quality liquid assets, yet neglects municipal securities. Municipal securities not only have a nearly a zero default rate, but they also meet the qualifications for limited price volatility, high trading volumes, and deep and stable funding markets required by the Federal Reserve, FDIC, and OCC under the proposal.