Municipal Bonds

NATaT Supports Bipartisan Efforts to Ensure that Municipal Securities are Classified as High Quality Liquid Assets

State and local governments have used municipal bonds to build public infrastructure for more than 200 years. These bonds enable communities to access necessary capital for critical infrastructure projects, such as the construction or improvement of highways, bridges, schools, hospitals, water and sewer systems, public parks, ports, airports, and other public works projects. In fact, 75 percent of all national infrastructure projects have been completed using this low-cost, market-driven financing tool. Over the last decade, municipal bonds were used to finance $1.65 trillion in state and local infrastructure investments.

H.R. 2209, which passed the House by voice vote on February 1, 2016, would require the appropriate Federal banking agencies to treat certain municipal obligations as level 2A liquid assets. This bill would amend the 2014 Liquidity Coverage Ratio rule approved by the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (OCC). (A companion bill has not been introduced in the Senate.) The rule established a minimum liquidity requirement for large banking organizations and identified acceptable investments – deemed HQLA – to meet this requirement, but it failed to include municipal securities in any of the acceptable investment categories. In doing so, regulators overlooked core features of these securities that are consistent with all of the criteria proposed by regulators to be characterized as HQLA, including limited price volatility, high trading volumes, and deep and stable funding markets. After U.S. Treasuries, municipal securities are the safest available investment, with state and local governments having nearly a zero default rate.

Not classifying municipal securities as HQLA will increase borrowing costs for communities to finance much-needed public infrastructure projects, as banks will likely demand higher interest rates on yields on the purchase of bonds during times of national economic stress, or even forgo altogether the purchase of securities during these times. The resulting cost impacts for local governments could be significant, as bank holdings of municipal securities and loans have increased dramatically over the past five years.

Classifying investment grade municipal securities as HQLA will help ensure low-cost infrastructure financing remains available for towns and townships and other communities to continue to build the infrastructure for commerce, public safety, job creation, and the development of an educated workforce that our citizens and local economies rely on.

NATaT also supports H.R. 2229, which would raise the bank-qualified (BQ) bond limit to $30 million from the current $10 million and index the limit to inflation. BQ bonds are bonds that small issuers can sell to banks, who can then deduct 80% of the interest expense they incur from purchasing or carrying the bonds.

To learn more, download the full policy paper.