A bipartisan group of senators wants to override regulators and loosen part of a key post-crisis banking rule that could raise borrowing costs for cities and counties.
Democrats Mark Warner of Virginia and Chuck Schumer of New York and Republican Mike Rounds of South Dakota on Tuesday introduced legislation that would define municipal bonds as liquid assets under the new liquidity rules enforced by banking regulators.
As the rules are written, municipal bonds are not counted as highly liquid. Banks are required to hold enough highly liquid assets to be able to fund 30 days of operations by selling them. Because they’re not included, municipal bonds are effectively more expensive for banks to hold.
Earlier this year, the Federal Reserve moved to include some municipal bonds in the definition of liquid assets. The two other agencies with responsibility for the rule — the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — have not followed the Fed’s lead. The senators hope to force their hand.
“As a former governor, I know firsthand how critical it is for states and municipalities to issue bonds that fund their basic operations, including the construction of schools, roads and local projects,” Warner said.
“We must ensure a continued and reliable access to capital markets for our local governments, and this legislation represents a compromise that achieves that while appropriately balancing concerns for the long-term stability of our financial system.”
While states and cities have called on the federal government to loosen the rule to lower costs for financing projects, some analysts have argued that municipal bonds are not as liquid as the other assets that are counted in the rule, such as U.S. Treasury securities.
The liquidity rule is meant to ensure that banks cannot be thrown into a crisis by finding themselves suddenly unable to come up with cash to pay a bill. The logic behind the rule was to force banks to have enough assets that they know they would be able to sell even in a turbulent market to stay afloat for a month.
Ten members of the Senate Banking Committee from both parties support the legislation to change the rule for municipal bonds, according to Warner’s office.
