The House on Monday easily passed legislation to scale back a new post-crisis rule on banks, in an effort to prevent it from raising borrowing costs for towns and schools.
The bill, sponsored by Rep. Luke Messer, R-Ind., would require the banking agencies to include certain municipal bonds among the assets that they consider “high quality liquid assets.” Banks are required to hold a certain amount of such assets under a new liquidity rule meant to prevent them from being caught with only illiquid assets in the middle of a crisis.
But state and local officials had warned that treating their bonds as illiquid assets would have the effect of raising borrowing costs for cities, schools, and construction projects.
“U.S. municipal bonds are among the safest investments in the entire world,” Messer said on the House floor before the bill passed by voice vote.
The Federal Reserve has already announced that it will consider revising the rule, which originally was finalized in late 2014, to include certain municipal bonds in the category of high-quality liquid assets. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, however, have not done so. The legislation passed Monday would require them to take that step.
Some critics have also claimed that the liquidity rule, taken together with Dodd-Frank rules that came out at the same time, forces financial institutions to hold too many Treasury securities, which are considered the safest asset. The result could be that bond markets turn out to be illiquid at a key moment precisely because banks are unable to sell them without incurring regulatory penalties, generating the kind of crisis the rules were created to prevent.
