US Fed issues rule proposition on holdings of assets including state and municipal bonds
- Proposed adding certain general obligation state and municipal bonds to the range of assets a banking organization may use to satisfy regulatory requirements designed to ensure that large banking organizations have the capacity to meet their liquidity needs during a period of financial stress.
Under the Liquidity Coverage Ratio (LCR) requirement adopted by the federal banking agencies last September, large banking organizations are required to hold high-quality liquid assets (HQLA) that can be easily and quickly converted into cash within 30 days during a period of financial stress. Subsequent study by the Federal Reserve suggests that certain general obligation U.S. state and municipal bonds should qualify under the LCR as HQLA because they have liquidity characteristics sufficiently similar to investment grade corporate bonds and other HQLA asset classes.
The proposed rule would allow investment grade, general obligation U.S. state and municipal bonds to be counted as HQLA up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities. The limits on the amount of a state or municipality's bonds that could qualify are based on the specific liquidity characteristics of the bonds.