House Passes Bill to Include Municipal Bonds under the Liquidity Coverage Ratio Rule
Commentary by Steven Lofchie
The U.S. House of Representatives passed a bill requiring federal banking regulators to include municipal bonds under the "Liquidity Coverage Ratio: Liquidity Risk Measurement Standards; Final Rule" (79 Fed. Reg. 15 61439).
H.R. 2209 requires the appropriate federal banking agencies to treat certain municipal obligations as "level 2A liquid assets." The bill was sponsored by Representatives Luke Messer (R-IN) and Carolyn Maloney (D-NY) and passed the House unanimously.
Specifically, the bill:
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amends the treatment of certain municipal obligations under the Federal Deposit Insurance Act to direct federal banking agencies to treat any municipal obligation as a high-quality level 2A liquid asset if the obligation is liquid, readily marketable and investment-grade as of the calculation date;
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calls on the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Comptroller of the Currency to amend the rule titled "Liquidity Coverage Ratio: Liquidity Risk Measurement Standards; Final Rule" in order to implement this Act.
According to Representative Maloney, the "decision to exclude investment grade municipal bonds from the liquidity buffer was senseless, and municipalities across the country were being hurt as a result. The Federal Reserve has concluded a fix is necessary and there is strong bipartisan consensus in support of correcting this problem."
Commentary
Leaving aside the issue of whether the liquidity requirements are set at the right levels, the question is whether this is good public policy or a subsidization of lending to governmental entities that bypasses the private sector. Notably, Representative Maloney describes banking regulators as "senseless" when they take any action that may burden governmental entities. Apparently, when they impose burdens on the private sector, they become Solomonic.