GFOA Comments on Federal Reserve Proposal to Classify Muni Securities as High Quality Liquid Assets

Thursday, July 30, 2015

This week the GFOA submitted comments to the Federal Reserve Board on its proposal to classify some municipal securities as high quality liquid assets
(HQLA) under the Liquidity Coverage Ratio rule approved by federal regulators in 2014. The 2014 rule established a minimum liquidity requirement for large banking organizations and identified acceptable investments – deemed HQLA – to meet this requirement. However it failed to include municipal securities in any of the acceptable investment categories, despite classifying foreign sovereign debt as HQLA. GFOA raised a number of concerns with the rule before it was approved, chief among them being the great likelihood that banks will 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 altogether, if these bonds don’t count toward their HQLA holdings.

In May of this year the Federal Reserve Board introduced a proposed rule that would permit some municipal securities to be classified as HQLA. GFOA’s comments to the Federal Reserve are primarily focused on four areas of concern with the proposed rule – (1) classifying investment grade revenue bonds as HQLA in addition to investment grade GO municipal securities; (2) removing the proposal’s restriction on a bank’s holding of no more than 25 percent of the outstanding amount of any individual muni CUSIP; (3) eliminating the proposal’s limitation on the amount of municipal securities a bank could include as HQLA to two times the average daily trading volume; and (4) doing away with the proposal’s five percent limitation on the amount of municipal securities that banks could include in their HQLA holdings.
Fourteen other associations joined GFOA in voicing these concerns, including the International City/County Management Association, National League of Cities, U.S. Conference of Mayors, National Association of Counties and the National Association of State Auditors, Comptrollers and Treasurers.