Schumer: New Federal Reserve Rule on Municipal Bonds Could Slow or Halt Critical Infrastructure Projects in Major Cities Across the US

Press Release

Today, U.S. Senator Charles E. Schumer wrote to top federal regulators to urge them to revise a new rule that could slow infrastructure development in major cities and states across the country. On September 3rd, the Federal Reserve, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency all approved a new rule implementing a quantitative liquidity coverage ratio (LCR) requirement for certain large financial institutions. The rule is intended to ensure that these institutions, such as domestic bank holding companies, savings and loan holding companies, and depository institutions maintain an amount of high quality liquid assets that is no less than 100% of its total net cash outflows over a 30-day stress period.

The rule does not allow municipal bonds to count toward an institution's high quality liquid assets, despite the fact that municipal bonds from cities like New York are widely considered high quality liquid assets by economists as well as the markets. Schumer is concerned that this exclusion will chill interest among large financial institutions, in particular those with more than $250 billion in assets, in municipal bonds as these institutions maintain liquidity buffers for periods of financial stress. As a result, state and city borrowing costs could increase and lead to less critical infrastructure being built. In a letter today, Schumer urged the three agencies to change the rule.

"It is hard to understand how all three federal regulators finalized a rule last week with such glaring inconsistencies. The rule inexplicably excludes all municipal securities from being considered as High Quality Liquid Assets, and could have a chilling effect on infrastructure development in cities and states from coast to coast if it's not revised," said Schumer. "Financial experts agree that certain municipal bonds should be considered high quality liquid assets and financial institutions ought to be able to count them that way. The broad exclusion of all municipal bonds from counting as HQLA under the current rule makes no sense on the merits and could have disastrous side effects, so I hope the regulators will heed our call and reconsider it quickly."

In a Senate Banking Committee hearing last week, top regulators expressed openness to revisiting the rule in response to questioning from Schumer. During the hearing, Schumer said, "investment-grade municipal bonds not only serve as the mechanism through which we're able to create jobs and finance critical infrastructure, but the securities serve as high-quality assets that adequately cover liquidity outflows in periods of stress. I certainly support regulatory efforts to ensure the banking section is able to absorb shocks in times of financial and economic stress, as well as enhanced liquidity, but I've not yet heard a convincing argument why, for instance, corporate debt can be considered a high-quality asset, but investment-grade municipal securities cannot.

Investment-grade municipal bonds have comparable, if not better trade volume and price volatility, and they performed well through the financial crisis. In fact, in 2008 and 2009, price declines on AAA corporate bonds were greater than the price declines on both AA municipal general bonds and revenue bonds. And this doesn't even touch on the fact the new rules permits foreign sovereign debt to be qualified as HQLA, while these municipal bonds are not."

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