State and city treasurers just got a little relief, as did Wall Street.
The Federal Reserve Board of Governors finalized a rule Friday easing up one of the key new post-crisis banking rules, a requirement that banks have a certain amount of liquid assets, in order to accommodate municipal bonds.
Under the the rule finalized Friday, some state and city bonds will be counted among the highly-liquid assets that banks can count toward the liquidity requirement.
The impact of the rule will be to increase demand for such bonds, lowering the interest rates that states and cities must pay to finance roads, bridges, buildings and other spending projects. It will also make it easier for banks to meet the liquidity requirement.
“Liquid” assets are ones for which there are many buyers and sellers, and that can reliably be traded at a given price. The idea behind the rule is to ensure that banks have a certain number of assets they can easily sell off if they get into trouble, rather than being stuck with hard-to-value or hard-to-sell assets that they would have to drastically mark down in order to trade them for cash.
Originally, the rule passed in 2014 only counted cash, government bonds, investment-grade corporate debt, and top-rated mortgage securities as liquid assets.
But state and local officials raised an uproar, joining Wall Street in pushing for the rule to be changed to incorporate kinds of municipal debt that are frequently traded.
Changing the rule was popular in Congress: In February, the House of Representatives passed legislation forcing the regulators to include high-quality state and local bonds in the definition of liquid assets, with the bill passing by voice vote.
The updated rule finalized Friday, however, only applies to banks and firms overseen by the Fed. The original rule was written by the Fed along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, neither of which have changed their versions of the rule, meaning that the requirements could now be uneven across the industry. The House bill would change the rule for all agencies.
The new version of the rule goes into effect July 1.
