WASHINGTON Jan 31 Leaders of U.S. cities and
states criticized bank regulators' proposal to block banks from
counting municipal debt toward buffers of easy-to-sell assets
they will have to hold in case of a credit crunch.
The proposed rules, which require banks to hold enough
liquid assets to meet cash needs for 30 days, are a key portion
of an international plan to make banks safer after the 2007-2009
The idea is that, in a crunch, banks should have enough
government debt and other assets on hand to cope with customer
withdrawals and to post collateral.
In October, the Federal Reserve, Office of the Comptroller
of the Currency and Federal Deposit Insurance Corp proposed
implementing much tougher rules for U.S. banks than required
under the Basel III international agreement.
Those included prohibiting municipal bonds from being
counted toward the liquid asset buffer. The comment period on
the proposed rules ends on Friday.
That decision "will rob financial institutions of a very
safe source of liquidity and prevent institutions from using
municipal bonds to diversify their portfolios," Janet Cowell,
North Carolina's treasurer, wrote in a comment letter on the
"This will increase borrowing costs, leading to increased
taxes and rates for citizens and delayed or foregone capital
projects," Cowell said.
Several cities and towns in North Carolina filed similar
comments, as did leaders from Houston; Junction City, Kansas;
and Washington County, Pennsylvania.
Ratings agency Fitch said on Thursday that U.S. banks held
about $404 billion in outstanding municipal securities and
loans, and the proposed rules could cause them to reduce those
"It would be more expensive for banks to hold municipal
bonds on their balance sheets and therefore banks that also
serve as dealers may become hesitant to provide liquidity in the
secondary market using proprietary capital, increasing liquidity
risk for municipal bond holders," the agency said.
The proposed liquidity rules are meant to respond to
experiences during the crisis, when some banks had significant
assets but did not have enough cash on hand to survive runs.
Banks with $250 billion or more in assets, such as JPMorgan
Chase & Co and Goldman Sachs Group Inc, must meet
the full requirement, while mid-sized banks face a less
stringent liquidity requirement.
Regulators want U.S. banks to meet the new requirements two
years before most foreign banks must comply, and they also
excluded covered bonds and private-label mortgage securities
from the liquid asset buffer.
Further, they created a new method for calculating how much
liquid assets banks need that would likely mean U.S. banks would
have to hold more than foreign banks would.
In comment letters filed with the regulators, several big
banks said these extra requirements go too far.
"The U.S. proposal includes a number of new operational
requirements ... that introduce uncertainties and unnecessary
burdens," wrote Gregory Hackworth, Bank of America Corp's