Three federal banking regulatory agencies on Wednesday issued an interim final rule, along with a request for comments, that amends the liquidity coverage ratio (LCR) rule to treat liquid and readily marketable, investment-grade municipal obligations as high-quality liquid assets (HQLA).
The agencies – the Federal Reserve Board, Federal Deposit Insurance Corp. (FDIC) and Office of the Comptroller of the Currency (OCC) – note that section 403 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155, signed into law this May) requires that the agencies, for purposes of their LCR rule and any other regulation that incorporates a definition of the term “high-quality liquid asset” or another substantially similar term, treat a municipal obligation as an HQLA (a “level 2B” liquid asset) if that obligation is “liquid and readily-marketable” and “investment grade” as of the LCR calculation date.
In addition, and as noted in an FDIC Financial Institution Letter (FIL) issued Wednesday, the interim final rule: adds a definition for “municipal obligations” to include an obligation of (1) a state or any political subdivision thereof or (2) any agency or instrumentality of a state or any political subdivision thereof; and adds a reference to the Fed Board’s definition of liquid and readily-marketable in 12 CFR 249.3 to the definition of “liquid and readily-marketable.”
The banking agencies adopted the LCR rule in 2014. The rule established a quantitative liquidity requirement designed to promote the short-term resilience of the liquidity risk profile of large and internationally active banking organizations.
Wednesday’s interim rule takes effect upon publication in the Federal Register; public comments are due 30 days after that.