Senator Schumer Urges Regulators to Revise the Liquidity Coverage Ratio Rule to Include Municipals (with Lofchie Comment)

Senator Charles Schumer (D-NY) sent a letter to the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation urging the regulators to revise the recently finalized Liquidity Coverage Ratio ("LCR") rule to include certain municipal bonds within the definition of "High-Quality Liquid Assets" ("HQLA").

Senator Schumer states that the "blanket" exclusion of these bonds in the current LCR rule could create a disincentive for banks to hold investment grade securities and thereby increase borrowing costs for municipalities. According to Senator Schumer, these bonds are the "lifeblood" of local government finance and the current version of the rule threatens to impede job growth and investment in infrastructure. He notes that certain of these debt issuances are considered high-quality liquid assets by markets and should be treated as such under the LCR rule. Instead of creating a new rule excluding the municipal bonds, Senator Schumer stated, developing criteria to assess the liquidity and performance of various municipal bonds would have been a better approach.

Senator Schumer asked that the banking regulators inform his office regarding any research or analysis on the "circumstances under which flexibility can be offered to account for certain municipal securities."

Lofchie Comment: Senator Schumer'sletter raises, at least implicitly, several broader issues. First, in creating a very narrow definition of "HQLA" with the aim of lessening systemic risk, the relevant regulators are indirectly imposing significant costs on issuers of, and investors in, assets that are not within the scope of that definition. As to Senator Schumer's concern expressed in his letter, the loser is municipal government, but in fact there are many types of potential losers; i.e., any user of a product not within the scope of the definition. Second, by creating a somewhat arbitrary definition of "HQLA," the government is creating powerful incentives for investment - and for disinvestment - in certain types of assets on noneconomic bases. Senator Schumer is concerned with the potential for disinvestment in municipals. Third, the letter implicitly raises the question of how familiar the relevant banking regulators are with securities markets, and whether their lack of familiarity is influencing their decision-making to the detriment of the capital markets and the economy.

See: Senator Schumer's Letter.Related news: Banking Agencies Issue Final Liquidity Coverage Ratio Regulations (September 3, 2014).