April 11, 2017

Van Hollen Introduces Bipartisan Legislation to Provide Financial Stability to Muni Bonds

U.S. Senator Chris Van Hollen has introduced bipartisan legislation to allow high quality municipal debt to be classified at a level equivalent to debt issued by corporations. Debt sold by state and local governments is currently excluded from consideration under a rule requiring banks to hold enough highly liquid assets to fund their operations for 30 days. This exclusion may create a disincentive for banks to hold their positions in the municipal-debt market, potentially making it harder for state and local governments to issue bonds to fund infrastructure projects.

"States and localities are on the front lines of investing in our communities, growing jobs, and strengthening infrastructure. We need to make sure they have the same access to capital as corporations, so they are able to fund critical projects and make necessary improvements," said Senator Van Hollen.

In addition to Senator Van Hollen, the legislation is co-sponsored by Banking Committee members Mark R. Warner (D-VA), Mike Rounds (R-SD), Tom Cotton (R-AR), Joe Donnelly (D-IN), Heidi Heitkamp (D-ND), John Kennedy (R-LA), Tim Scott (R-SC), Jon Tester (D-MT), and Thom Tillis (R-NC), as well as Senate Minority Leader Chuck Schumer (D-NY).

Under proposed rules issued by federal banking regulators, debt sold by states and localities isn't eligible to count as High Quality Liquid Assets (HQLA), which means they won't qualify as assets necessary for banks to retain under new funding requirements issued following the financial crisis. These requirements ensure that banks maintain a liquidity coverage ratio that includes holding a certain amount of HQLA, but prohibits munis from being considered as HQLA. The rules effectively cabin off an entire category of high quality and highly liquid debt from being considered as HQLA, limiting the incentive for financial institutions to hold these assets and potentially adversely affecting the issuance of such debt by states and municipalities.

The Federal Reserve recently weighed in on the issue, making limited changes to their previously issued rule. However, the two other regulators involved-the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp-have made no changes to allow the institutions they regulate to count municipal bonds toward their liquidity buffers. The Warner-Rounds bill would categorize certain types of municipal debt as Level 2B, on par with certain corporate debt, and would receive a 50 percent equivalent to the liquidity ratio requirement. This action would bring municipal bond debt on par with corporate debt, and help stabilize the municipal securities market.

The bill text is available here.