(Bloomberg) -- Several U.S. senators are set to introduce a bipartisan bill this week that would include municipal bonds among assets that banks need to hold to weather a financial shock, according to a congressional aide.
Democratic Senators Mark Warner and Chuck Schumer and Republican Mike Rounds will introduce a scaled-down version of legislation that passed the House in February that would classify investment grade municipal bonds on par with U.S. agency securities issued by Fannie Mae and Freddie Mac to meet bank liquidity rules. The Senate measure would classify munis as “Level 2B” assets comparable to certain corporate bonds and stocks, according to the aide, who wasn't authorized to speak on the record.
Level 2B assets are subject to a 50 percent “haircut,” meaning if a bank holds $1 million of a municipal bond, $500,000 counts towards its liquidity buffer. The House bill classifies munis as Level 2A assets, which have a 15 percent haircut. Level 2A and 2B assets can make up no more than 40 percent of total "high quality liquid assets," with Level 2B assets restricted to no more than 15 percent of HQLA.
“Having bipartisan, bicameral legislation is an excellent first step," said Emily Brock, federal liaison for the Government Finance Officers Association. “It shows a commitment on their part for what we municipal securities to be, which is high quality and liquid.”
Local-government officials and securities-industry lobbyists turned to Congress after regulators including the Fed adopted rules that would restrict or bar banks from including munis among high quality liquid assets. State treasurers and city finance officers said the new rules, if not changed, will saddle them with higher borrowing costs eliminating incentives banks have to purchase the bonds.
The impending introduction of the Senate bill was reported earlier by Dow Jones.
To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net. To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net, William Selway
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
