U.S. Sens Mike Rounds (R-SD) and Mark Warner (D-VA) put forth legislation to allow high quality municipal debt to be classified at a level equivalent to debt issued by corporations.
Currently, debt sold by state and local governments is not considered high quality liquid assets (HQLA) under federal rules. That means they will not be considered under a rule that requires banks to hold enough high quality liquid assets to fund their operations for 30 days.
The rules effectively exclude an entire category of high quality and highly liquid debt from being considered as HQLA, limiting the incentive for financial institutions to hold these assets and potentially adversely affecting the issuance of such debt by states and municipalities. That could potentially make it harder for state and local governments to issue bonds to fund infrastructure projects.
The Rounds-Warner bill would categorize certain types of municipal debt as level 2B, on par with certain corporate debt, and would receive a 50 percent equivalent to the liquidity ratio requirement. This action would equal municipal bond debt with corporate debt, and help stabilize the municipal securities market.
“Our bipartisan legislation would allow banks to count high-quality, investment-grade municipal debt as level 2B High Quality Liquid Assets under federal banking regulations,” Rounds said. “Doing so will help maintain a healthy demand for this debt and prevent borrowing rates for municipalities from dramatically increasing.”
In addition to Rounds and Warner, the bipartisan legislation is cosponsored by Sens. Tom Cotton (R-AR), Joe Donnelly (D-IN), Heidi Heitkamp (D-ND), John Kennedy (R-LA), Tim Scott (R-SC), Jon Tester (D-MT), Thom Tillis (R-NC) and Chris Van Hollen (D-MD).
“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.”