Bipartisan legislation led by U.S. Sen. Mike Rounds (R-SD) on Tuesday would allow high-quality municipal debt to be classified at a level equivalent to debt issued by corporations.
Rounds was joined by U.S. Sens. Mark Warner (D-VA) and Chuck Schumer (D-NY), all members of the Senate Banking Committee, in leading legislation that would align municipal debt with corporate debt in an effort stabilize the municipal securities market.
Current rules exclude debt from consideration under a provision that requires banks to hold enough highly liquid assets to fund operations for 30 days. The exclusion disincentivizes some banks from participating in the municipal debt market, which makes it more difficult for state and local governments to finance infrastructure projects.
“Making sure South Dakota and our municipalities have access to capital at the best possible rates is vital for communities to finance important infrastructure projects,” Rounds said. “Our legislation would allow banks to count qualifying municipal debt as High Quality Liquid Assets, helping to maintain demand for the debt which would prevent borrowing rates for municipalities from dramatically increasing.”
Federal banking regulators have proposed rules that would prohibit counting debt sold by state and local governments from counting as high quality liquid assets, which means that municipal debt wouldn’t qualify as bank assets under funding rules handed down after the financial crisis.
Rounds’ bill would qualify certain types of municipal debt as Level 2B, on par with some types of corporate debt. It would also allow municipal debt to receive a 50 percent equivalent in the liquidity ratio requirement.