“The Federal Reserve Board on Thursday proposed adding certain general obligation state and municipal bonds to the range of assets a banking organization may use to satisfy regulatory requirements designed to ensure that large banking organizations have the capacity to meet their liquidity needs during a period of financial stress. Under the Liquidity Coverage Ratio (LCR) requirement adopted by the federal banking agencies last September, large banking organizations are required 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. Subsequent study by the Federal Reserve suggests that certain general obligation U.S. state and municipal bonds should qualify under the LCR as HQLA because they have liquidity characteristics sufficiently similar to investment grade corporate bonds and other HQLA asset classes. 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 would apply only to entities subject to the LCR and supervised by the Federal Reserve:

• 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; 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.

No bank that is a subsidiary of a holding company with less than $50 billion in assets is required to meet any LCR requirement. The recent financial crisis highlighted the need for enhanced liquidity risk-management practices at the largest financial institutions. Financial institutions with sufficient liquidity reserves are better able to mitigate the risks of creditor and counterparty runs. The proposed rule released Thursday 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 will be accepted until July 24, 2015.”