Federal Reserve Board Expands Definition of High-Quality Liquid Assets to Include Certain State and Municipal Securities
Commentary by Steven Lofchie
The Board of Governors of the Federal Reserve System adopted a final rule to amend its liquidity coverage ratio rule and modified liquidity coverage ratio rule (together, "LCR rule") to include certain U.S. municipal securities as high-quality liquid assets ("HQLA").
The LCR rule requires a company to maintain an amount of HQLA (the numerator of the ratio) that is no less than its total net cash outflow amount over a forward-looking 30 calendar-day period of significant stress (the denominator of the ratio). While the LCR requirement did not initially include U.S. municipal securities as HQLA, subsequent analysis suggested to the Board that certain U.S. municipal securities should qualify as HQLA because they have liquidity characteristics similar to other HQLA classes, such as debt securities.
The final rule allows investment-grade, U.S. general obligation state and municipal securities to be counted as HQLA up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities.
The Board noted that while "generally similar" to the proposal, the final rule, in response to comments, does not include the restriction on insured municipal securities and the limit on the amount of a municipal securities issuance that may count as HQLA.
The final rule is effective on July 1, 2016.
Commentary
Is this good public policy, or is this the government favoring lending to the public sector by effectively deeming loans to the public sector as being less risky than they, in fact, are?