The Federal Reserve Proposes Including Certain Municipal Obligations as HQLA
To kick off the Memorial Day weekend, the Federal Reserve Board announced a proposal to include certain state and municipal general obligation bonds in the calculation of High Quality Liquid Assets, the numerator of the new Liquidity Coverage Ratio requirement to which large banks are subject. Although the proposal is a step in the right direction for municipal issuers looking to sustain banks’ appetite for their bonds, and would help banks comply with the LCR, the limitations contained in the proposal make it a far cry from the broad inclusion many issuers and banks have called for since the final LCR was adopted without allowing for any municipal bonds as HQLA. In addition, the OCC and FDIC have not followed the Fed and made similar proposals. Without a significant easing of the restrictions contained in the proposal and support from both the OCC and FDIC, the Fed’s expansion of HQLA to include certain municipal obligations is unlikely to have a meaningful impact on banks subject to the LCR.