Treatment of HQLA under liquidity coverage ratio made final by banking regulators

Certain municipal obligations will be treated as high-quality liquid assets (HQLA) under the liquidity coverage ratio by a rule to become final within around the beginning of July, the federal banking agencies said Thursday.

The action by the regulators – the Federal Deposit Insurance Corp. (FDIC), Federal Reserve and the Office of the Comptroller of the Currency — essentially makes permanent an interim final rule the three banking regulators adopted in August 2018. Under last year’s regulatory relief legislation (the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA, S. 2155), the agencies are required to treat a municipal obligation as HQLA under the LCR rule if that obligation is “liquid and readily-marketable” and “investment grade.”

The interim final rule also: added 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.

The final rule issued Thursday was adopted and released by the regulators without change from last year’s interim final rule. It goes into effect 30 days after publication in the Federal Register.

Reg lookup: Liquidity Coverage Ratio Rule: Treatment of Certain Municipal Obligations as High-Quality Liquid Assets

Agencies issue final rule regarding the treatment of certain municipal obligations as high-quality liquid assets