State and Local Associations Continue to Make the Case to Classify Municipal Securities as HQLA

ARTICLE | Apr 7, 2016

Infrastructure funding is one of the most critical functions of state and local governments in the United States. Tax-exempt municipal bonds, a fundamental feature of the United States tax code since 1913,  provide a low-risk, cost-effective financing tool for the construction of infrastructure projects that are the lynchpin of the U.S. economy - improving quality of life, creating jobs, and sustaining economic development. The vast majority (approximately 90 percent) of state and local capital spending is financed through issuance of municipal bonds.

ICMA, along with GFOA and its state and local association partners, is working to urge Congress to enact legislation (HR2209) which would classify municipal securities as high quality liquid assets (HQLA). This important legislation is needed in order to amend the liquidity coverage ratio rule approved by federal regulators in 2014, which classifies foreign sovereign debt securities as HQLA while excluding investment-grade municipal securities in any of the acceptable investment categories for banks to meet new liquidity standards. The liquidity coverage ratio rule was designed to ensure that large banks maintain liquid assets that can easily be converted to cash during times of national economic crisis.

While the Federal Reserve has recently issued a final rule amending the 2014 rule to admit some municipal securities as HQLA, state and local associations believe the rule still has significant shortcomings (such as permitting HQLA designation to GO bonds but not revenue bonds), and would apply only to two of the nine bank holding companies. Furthermore, the Federal Reserve rule is not as inclusive of municipal securities as a rule that is coordinated with the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of Currency (OCC).

The FDIC and OCC have been unwilling to modify the rule for municipal securities. In absence of cooperation from these agencies, the state and local coalition is working to urge members of Congress to enact legislation that would require the Federal Reserve, FDIC, and OCC to classify all investment grade, liquid, and readily marketable securities as HQLA. Only legislation will compel the FDIC and OCC to act on this issue, and ensure that the greatest number of municipal securities can be classified as HQLA.

ICMA urges members to reach out to their Senators and urge them to join in being cosponsors of a companion bill to HR2209 to address this issue. GFOA has provided a draft letter for you to use in order to support this campaign, which is available here


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