New rule allows banks to count municipal securities as liquid assets

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WASHINGTON — Banking regulators on Wednesday issued an interim final rule that will allow certain municipal obligations to count toward a bank’s required amount of liquid assets.

The rule, which implements a provision of the regulatory relief law that was enacted in May, will become effective upon publication in the Federal Register, but the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. said they will still receive comments on the rule.

Allowing municipal obligations expands the types of instruments banks can use to satisfy post-crisis liquidity requirements.

The Fed, OCC and FDIC in 2014 finalized a rule known as the Liquidity Coverage Ratio, which requires the largest banks to hold enough liquid assets to maintain their operations for 30 days. The purpose of the rule was to minimize the risks posed by a sudden and drastic freezing of markets under severe stress conditions like those experienced in the financial crisis.

The regulators included in the definition of “High Quality Liquid Assets,” or HQLA, things like cash, Treasuries and certain bonds. But banks and municipalities argued that municipal bonds ought to be included as well. The Fed in 2016 moved to include municipal bonds in the definition of so-called 2B HQLA, meaning banks can hold a limited proportion of their HQLA in those and other kinds of assets.

But the recent law required that the agencies revise the liquidity rule to include other municipal obligations as 2B HQLA if they are “liquid and readily marketable” and “investment grade.” That change allows banks to hold municipal securities as HQLA in addition to individual bonds.

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LCR Regulatory relief Dodd-Frank Liquidity requirements Munis Federal Reserve FDIC OCC