Article

Municipal securities reclassified in new senate banking bill

On May 24, 2018 President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, the largest banking bill since Dodd Frank. Also known as the Senate Banking Bill, it rolled back many provisions of Dodd-Frank and relaxed some regulations covering fiduciary responsibilities.

Issuers of municipal securities, including cities, towns, counties, schools, libraries, and others should take note, as the Senate Banking Bill also amended an important provision governing the treatment of municipal securities.

Dodd-Frank Rolled Back, But Look Closer

The Senate Banking Bill contained myriad updates to Dodd-Frank, such as consumer access to credit, relaxed rules for investors, and varied levels of deregulation for smaller financial institutions, among many other changes. However, a new classification of municipal bonds is arguably the most important piece of the amended legislation that concerns issuers of municipal securities.

For years, advocates of municipal securities have said the original rules were too restrictive and discouraged investment from larger banks, despite municipal bonds’ historically safe investment profile. Nevertheless, in the original regulations, municipal securities were left out of Liquidity Coverage Ratios (LCRs) – liquid assets that banks are required to keep on hand to safeguard against a future economic crisis – because they weren’t considered “high quality liquid assets.”

As part of the new Senate Banking Bill, municipal bonds are now considered high quality liquid assets.

What Does This Mean?

For financial institutions, this means that they have another option to satisfy LCR requirements.

For issuers, giving banks access to that much more in available investments may increase the attractiveness of municipal securities to larger banks, and municipal debt interest rates could also decrease.

Why the change now? Congress determined that the characteristics of municipal securities are consistent with criteria previously established for high quality liquid assets like mortgage-backed securities. These characteristics include limited price volatility, high trading volumes, and deep and stable funding markets. Some issuers were hoping for a higher classification to match sovereign debt, but overall the consensus is positive for the new rule. 

Another important update contained in the Senate Banking Bill is that the $50 billion threshold for financial institutions has been increased to $250 billion. Lifting the ceiling threshold is meant to help smaller, local lending institutions better compete by lowering compliance costs.

Although the Senate Banking Bill may be divisive depending on political views, this is one change that should be welcome news to cities, towns, counties, schools, libraries, and other entities that issue municipal bonds. 

For more information on this topic, or to learn how Baker Tilly municipal specialists can help, contact our team.

Baker Tilly Municipal Advisors, LLC is a registered municipal advisor and wholly-owned subsidiary of Baker Tilly US, LLP, an accounting firm. Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities.

Susan Borries Reed
Director, J.D.
Tax Reform Progress Report | June 2018
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Tax Reform Progress Report | June 2018