From the Regulators

General obligation U.S. state and municipal bonds may quality as high-quality liquid assets

By James Langton |

Large U.S. banks will be able to meet their liquidity requirements with a broader range of securities in times of stress, if new proposals that the U.S. Federal Reserve Board unveiled today come into effect.

Regulators around the world have adopted liquidity coverage ratio (LCR) requirements in the wake of the global financial crisis that require large banking organizations to hold high-quality liquid assets (HQLA) that can be easily and quickly converted into cash within 30 days during a period of financial stress. The Fed notes that the financial crisis highlighted the need for enhanced=liquidity risk-management practices at large financial services institutions, which helps mitigate the risks of creditor and counterparty runs.

The Fed said on Thursday that its research suggests certain general obligation U.S. state and municipal bonds should qualify as HQLA because they are sufficiently similar to investment-grade corporate bonds and other HQLA asset classes in terms of their liquidity.

The proposed rule would allow investment-grade, general obligation U.S. state and municipal bonds to be counted as HQLA up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities. The limits on the amount of a state or municipality's bonds that could qualify are based on the specific liquidity characteristics of the bonds.

The proposed rule, the Fed says, "would maintain the strong liquidity standards of the LCR while providing banks with the flexibility to hold a wider range of HQLA."

Comments on the proposed rule are due by July 24.