U.S. House passes bill to shelter munis from threat of bank rule

The U.S. House of Representatives on Monday approved a bill by a voice vote that would force banking regulators to classify investment-grade municipal bonds as liquid assets, in a victory for local government officials and securities industry lobbyists.

The battle now moves to the Senate for those seeking to overturn regulations adopted by the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. that would restrict or bar banks from including munis among the assets they need need to hold to weather a financial crisis.

“Put simply, our bill requires the federal government to recognize the obvious, that our municipal bonds are some of the safest investments in the world and that we shouldn’t have rules that give preferential treatment to corporate bonds or other countries’ bonds over our own,” said Rep. Luke Messer, an Indiana Republican who wrote the bill, HR 2209. New York Democrat Carolyn Maloney co-sponsored it.

The regulations threaten to curb demand from banks in the $3.7 trillion muni market, where they’ve increased their holdings by more than any other buyers since the recession ended in 2009. State and local officials said the new rules, if not changed, will saddle them with higher borrowing costs by eliminating incentives banks have to purchase their bonds.

“These decisions impact families when schools no longer accommodate enrollment, and impacts communities as bridges crumble and roads fail because repair and new construction simply isn’t financially feasible,” Messer said in a speech on the House floor.

The Government Finance Officers Association is working with members of the the Senate Banking Committee to introduce a version of the House bill in the Senate, said Dustin McDonald, Director of the GFOA’s Federal Liaison Center.

“If this legislation is not enacted before the end of the year then all the work we’ve done in the House will be for nothing and we’ll go back to the drawing board, which we don’t want to do,” he said.