WASHINGTON—U.S. Sens. Mark R. Warner (D-VA), Chuck Schumer (D-NY), and Mike Rounds (R-SD), members of the Senate Banking Committee, led a bipartisan group of Senators in introducing legislation to allow high quality municipal debt to be classified at a level equivalent to debt issued by corporations. Debt sold by state and local governments is currently excluded from consideration under a rule requiring banks to hold enough highly liquid assets to fund their operations for 30 days. This exclusion may create a disincentive for banks to hold their positions in the municipal-debt market, potentially making it harder for state and local governments to issue bonds to fund infrastructure projects.

“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,” said Sen. Warner. “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.”

“Municipal bonds are the lifeblood of everything from roads and bridges to schools and hospitals. If banks retreat from the muni-bond market, it could choke off a critical source of investment on which our cities and localities rely. This bill protects the stability of our markets while providing continued access to muni bonds for local governments,” said Sen. Schumer.  

“Making sure South Dakota and our municipalities have access to capital at the best possible rates is vital for communities to finance important infrastructure projects,” said Sen. Rounds. “Our legislation would allow banks to count qualifying municipal debt as High Quality Liquid Assets, helping to maintain demand for the debt which would prevent borrowing rates for municipalities from dramatically increasing.”

In addition to Sens. Warner, Schumer and Rounds, the legislation is co-sponsored by Sens. Jon Tester (D-MT), Mark Kirk (R-IL), Heidi Heitkamp (D-ND), Tim Scott (R-SC), Joe Donnelly (D-IN), Jerry Moran (R-KS), and David Vitter (R-LA).

Under proposed rules issued by federal banking regulators, debt sold by states and localities isn’t eligible to count as High Quality Liquid Assets (HQLA), which means they won’t qualify as assets necessary for banks to retain under new funding requirements issued following the financial crisis. These requirements ensure that banks maintain a liquidity coverage ratio that includes holding a certain amount of HQLA, but prohibits munis from being considered as HQLA. The rules effectively cabin off 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. 

The Federal Reserve recently weighed in on the issue, making limited changes to their previously issued rule. However, the two other regulators involved—the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp—have made no changes to allow the institutions they regulate to count municipal bonds toward their liquidity buffers. The Warner-Schumer-Rounds bill would categorize certain types of municipal debt as Level 2B, on par with certain corporate debt, and would receive a 50% equivalent to the liquidity ratio requirement. This action would bring municipal bond debt on par with corporate debt, and help stabilize the municipal securities market.