Fed to Permit Certain U.S. Municipal Securites to be Accepted as Level 2B Assets for Basel III LCR

Last Friday, the Federal Reserve (“Fed”) released final rule changes to treat more municipal securities as high-quality liquid assets (“HQLA”) under liquidity requirements for large financial institutions, according to a recent Bond Buyer article

Typically level 2B assets are subject to a 50 percent haircut, and may not exceed 15 percent of a covered company’s HQLA amount. The final rule is slightly more lenient and “includes as level 2B liquid assets under the LCR rule general obligation securities of a public sector entity (i.e., securities backed by the full faith and credit of a U.S. state or municipality) that meet similar criteria as corporate debt securities that are included as level 2B liquid assets, subject to limitations that are intended to address the structure of the U.S. municipal securities market.” Municipal securities would still have to meet the liquid and readily marketable standard outlined in the rule to be considered level 2B assets. 

The rule changes will take effect on July 1, 2016, but other banking regulators still exclude municipal securities from HQLA.

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