Magazine article American Banker

Fed to Allow Muni Bonds to Count toward Liquidity Rule

Magazine article American Banker

Fed to Allow Muni Bonds to Count toward Liquidity Rule

Article excerpt

Byline: John Heltman

WASHINGTON -- The Federal Reserve Board proposed a change Thursday to its recently finalized liquidity rules for the largest U.S. banks that would allow certain municipal and state bonds to qualify as high-quality liquid assets.

Among the chief reforms outlined in the Dodd-Frank Act was the weaning of banks off of short-term wholesale funding as a means to meeting day-to-day liquidity needs. The Basel III international accord, and its subsequent implementation in the U.S., addressed that issue by requiring banks to keep enough high-quality liquid assets on hand to maintain operations for 30 days in the event of a stress event in the market.

That rule, known as the liquidity coverage ratio, outlines what kinds of assets qualify as high-quality, which can be easily converted in times of crisis. The final rule gave various criteria for such assets, including having active repurchase markets at all times, a diverse and large market of buyers, and high volume.

The proposal released Thursday would widen which assets could count as high quality.

"The recent financial crisis highlighted the need for enhanced liquidity risk-management practices at the largest financial institutions," the Fed said in a statement. "The proposed rule released Thursday would maintain the strong liquidity standards of the LCR while providing banks with the flexibility to hold a wider range of HQLA."

There are three categories of assets, each subject to different requirements and haircuts based on the relative liquidity and risk profiles. …

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