On June 6, 2019, the US federal banking agencies (the Federal Reserve Board (FRB), Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation, collectively, the “banking agencies”) published a permanent final rule regarding banking organizations being able to use municipal obligations to satisfy their bank’s liquidity cover ratio (LCR) requirements.
In September 2014, the banking agencies finalized Liquidity Coverage Ratio (LCR) rules, based on international liquidity standards for banks. The LCR requires that certain large banking organizations maintain sufficient high quality liquid assets (HQLA) to cover cash outflows during a 30 day liquidity stress scenario that includes certain levels of deposit run-off or a reduction in wholesale funding capacity. HQLA include cash and, among other instruments, securities issued or unconditionally guaranteed by the US Treasury, and certain securities issued by US-government sponsored enterprises. HQLA did not include US state and municipal debt securities, even though commenters asserted that their liquidity profile met or exceeded that of other assets classified as HQLA in the final LCR rule.
The FRB issued some limited relief in in 2016. In May 2018, the “Economic Growth, Regulatory Relief, and Consumer Protection Act” was enacted. Section 403 mandated that the banking agencies allow certain banking organizations to use liquid, readily-marketable and investment grade municipal obligations to meet their LCR requirements. The banking agencies issued the interim final rule shortly thereafter. Our blog post on passage of that law can be found here.
The permanent final rule is effective on July 5, 2018.