On April 1, 2016, the Federal Reserve Board (FRB) finalized a rule to include certain US general obligation state and municipal securities in the range of assets large banking organizations may use to satisfy regulatory requirements designed to give banking organizations the capacity to meet their liquidity needs during a period of financial stress.1
The liquidity coverage ratio (LCR) requirement adopted by the federal banking agencies in September 2014, requires large banking organizations to hold a minimum amount of high-quality liquid assets (HQLAs) that can be readily converted into cash during a 30-day period of financial stress.2 This forces banks to have sufficient liquidity reserves to mitigate the risk of creditor and counterparty runs.
While the LCR requirement did not initially include US municipal securities as HQLAs, subsequent analysis by the Federal Reserve suggested that certain US municipal securities should qualify as HQLAs because they have liquidity characteristics similar to other HQLA classes, such as corporate debt securities.3
The final FRB rule allows investment-grade, US general obligation state and municipal securities to be counted as HQLAs 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’s or municipality’s securities that could qualify are based on the liquidity characteristics of the securities.4
The final rule is effective July 1, 2016 and is applicable only to institutions supervised by the FRB with LCR requirements, including:5
- Bank holding companies, certain savings and loan holding companies, and state member banks with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure;
- State member banks with $10 billion or more in total consolidated assets that are subsidiaries of the above entities;
- Nonbank financial companies designated by the Financial Stability Oversight Council for Board supervision, to which the Board has applied the LCR requirement by separate rule or order; and
- Bank holding companies and certain savings and loan holding companies with $50 billion or more in total consolidated assets, to which a less stringent LCR applies.
The FRB rule does not apply to community banks as they are not subject to LCR requirements; and does not include the restriction on insured municipal securities and the limit on the amount of a municipal securities issuance that may count as HQLA.
- Board of Governors of the Federal Reserve System Press Release, April 1, 2016. Access at: http://www.federalreserve.gov/newsevents/press/bcreg/20160401a.htm
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