Cities, states, say U.S. bank rule change will raise muni borrowing costs

Sept 3 Wed Sep 3, 2014 3:31pm EDT

Sept 3 (Reuters) - American cities and states criticized a vote on Wednesday by U.S. regulators that tightened rules on which assets banks can sell in the event of a credit crunch, saying the move will raise their borrowing costs and hamper vital infrastructure projects.

U.S. regulators adopted tighter standards on liquidity requirements for large banks, part of a global effort to make big banks such as JPMorgan Chase and Citigroup more resilient in a future financial crisis.

In doing so, regulators excluded debt issued by U.S. states and cities from banks' high-quality liquid assets, or HQLA.

Cities and states are worried that if municipal debt is no longer considered a high-liquid asset, banks will have less incentive to buy their bonds. As a result, they say their borrowing costs will rise, making it even more difficult to fund schools, hospitals and building projects.

"For us, it's quite simple," said Ronald C. Green, chief financial officer of Houston, Texas. "Our borrowing costs go up. We all want to see the banks protected, but municipal bonds have funded the infrastructure of this entire country."

Green, along with CFOs from 17 other U.S. cities, wrote to the Federal Reserve on June 3 "imploring" officials not to drop municipal securities from the list of banks' high-liquid assets.

He said Houston will mobilize its lobbying firm, Washington-based Akin Gump, to keep pressure on regulators. He said the National League of Cities, representing 30,000 municipalities, will also mobilize.

"We will descend on Washington, and we will descend on our congressional leaders," Green said.

On Tuesday, ahead of Wednesday's vote, the National Association of State Treasurers wrote to the Fed and the U.S. Treasury warning that the rule change will "increase costs for municipal issuers and reduce market liquidity and increase volatility."

Fed officials said they did not think the rule would have significant implications for the $3.7 trillion municipal bond market.

The Fed also said it plans to propose allowing certain high-liquid municipal securities to count as a sellable asset at a later date, after further review.

U.S. banks' holdings of municipal securities have risen from $297 billion at the end of 2011 to $419 billion in 2013 - or from about 8 percent to 11.5 percent of the market - according to Michael Decker, co-head of the Municipal Securities division of the Securities Industry and Financial Markets Association (SIFMA).

The largest holders of municipal bonds are retail investors, accounting for about 70 percent of the market.

Alan Schankel, a managing director on Janney Capital Market's Fixed Income Strategy team, said the rule change might result in slight increases in borrowing costs on the margins.

But if high-liquid muni bonds were included later, that would involve debt issued by major cities, port authorities and other regular issuers of muni debt, Schankel said.

"I don't see this as huge," he said. (Reporting by Tim Reid; Additional reporting by Emily Stephenson; Editing by Dan Grebler)

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