The Federal Reserve, under pressure from lawmakers and state
officials, is considering allowing banks to use certain types of municipal debt
to satisfy a new postcrisis financing rule. On Wednesday, U.S. regulators are expected to finalize safeguards
requiring that banks hold enough liquid assets—such as cash or those easily
convertible to cash—to fund their operations for 30 days if other sources of
funding aren't available. Municipal securities issued by states and localities
wouldn't count as "high-quality liquid assets" under the rule,
meaning such securities wouldn't qualify for use under the new funding requirements.
States and localities have warned that excluding their
securities could cause banks to retreat from a $3.7 trillion market in which
they have increasingly become an important player, which could driving up
borrowing costs to finance roads, schools and bridges. Banks have nearly
doubled their ownership in municipal securities over the past decade to more
than 11%, according to Fed data.
The Fed is now considering providing some relief in the
coming months and may allow banks to include some types of municipal bonds as
part of the new safeguards, the person said. The regulator is scrutinizing
whether to eventually include more-frequently traded municipal securities but
is trying to find a way of distinguishing which bonds it will accept, the
person said. There are roughly 60,000 borrowers in the enormous municipal
market but only a relatively small number see their bonds frequently traded,
according to industry experts.
It is unclear if the Fed could act unilaterally to alter the
rules, which are being written jointly with the Federal Deposit Insurance Corp.
and the Office of the Comptroller of the Currency.
The rules being finalized Wednesday are intended to prevent
a repeat of the 2008 financial crisis when financial markets froze due to a
lack of liquidity. Regulators want banks to have enough ready cash on hand so
they can finance themselves if markets freeze as they did in the last meltdown.
Among those assets that will qualify under the rule as "liquid" are
Treasury’s and highly rated debt issued by some foreign governments.
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