State Treasurers Panic as Big Bank Liquidity Rules Set for Release Today

Wall Street on Parade ^ | September 3, 2014 | By Pam Martens and Russ Martens

[DeaconBenjamin]

The FDIC and the Office of the Comptroller of the Currency are set to release new liquidity rules today. The rules will redefine the types of liquid assets giant Wall Street banks must hold to meet the new Basel III Liquidity Coverage Rule.

The Federal regulators are expected to emphasize banks holding short-term U.S. Treasury securities in order to meet a bank run or credit crunch lasting 30 days.

The state treasurers’ panic over the rule is justified. According to press reports, the Federal regulators may exclude municipal bonds issued by states, counties, cities and school districts from the category “high quality liquid assets” (HQLA) which could be easily liquidated should a mega bank experience a run on its assets. These new rules may critically impact the economic interests of the U.S.

In a January 31, 2014 letter to the Federal banking regulators, the National Association of State Treasurers could barely contain their outrage, writing:

“[Banks] are an important portion of this vitally-important market, and their absence would be detrimental to its efficient functioning. We believe that the immediate and direct consequence of this exclusion to municipal issuers and their taxpaying constituents is unnecessary, and in many instances unbearable, increasing the cost of financing desperately needed [projects] for repair and replacement of existing municipal infrastructure.…

“The Federal Reserve currently accepts all municipal securities (not just those that are rated investment grade) at a 2%-5% haircut when pledged at the central bank, depending upon the maturity of the securities. Thus, the Federal Reserve already acknowledges the sound credit, diversification, and liquidity value of municipal securities by accepting them at the same haircut as U.S. agency securities and GSEs and at better haircuts than U.S. corporate bonds (which would be included as HQLA under the proposed rule)…

[Ingtar]

So that’s how they want to continue financing the growing debt, require banks to buy it.

[Red Badger]

What this is is an attempt to bankrupt States and municipalities in order to make them more beholden to the federal government. Jerking their leash will be a whole lot easier now......................

[Mariner]

States and Municipalities need to suck it up and let their bonds stand on their own merits: Will they be paid, in full, and on time?

Often big banks can afford to wait on a payment, or just roll over an asset once mature. This relieves the issuer from the real pressures of making their debt good.

These new rules are good, solid rules and good for the economic interests of all Americans.

[shotgun]

Which is why the bond holders require in the covenants that these agencies tax or raise utility rates so that the agencies have cash + some percentage on hand that exceeds that annual bond payment.

So if an agency sold $5 Million in bonds at 20 years and 5% the annual payment is $260,000. But the covenants require 150% cash reserve on hand that requires the agency to have $390,000 on hand. Failure to do so can result in penalties from the bond holders and reduced credit ratings and higher interest rates for the next bond sales.

[taildragger]

State Banks are the answer to Fedzilla and the Muni-Bond tempest that swirling about with this ruling. North Dakota has one, and many are trying in other states including in Michigan but Vermont has ok'd one, however I am not sure if Vt's is up and running. Tangent to this, this does look like another move to close all exit doors....

[Rapscallion]

What this is is an attempt to bankrupt States and municipalities in order to make them more beholden to the federal government. Jerking their leash will be a whole lot easier now.

Is this trickle-down debt from the federal government?

[bgill]

As if the FDIC would ever really come through in a crunch. Your money is safer under the mattress.

[Mariner]

If so, how was Detroit able to go BK?

Those covenants you mention are violated all them time, sometimes covertly through fancy bookeeping and sometimes overtly like Detroit.

Everyone relies on the Muni Insurers...who could never begin to cover a wholesale run.

Banks should not be allowed to claim State and Muni bonds...much less School Board bonds...as High Quality Liquid Collateral.

But they should feel free to buy as many as they choose.

[GeronL]

They panic?

seriously?

How long have they known this was coming?

[Georgia Girl 2]

I agree. I would love to see the Georgia State Bank open up.

[Born to Conserve]

“These new rules are good, solid rules and good for the economic interests of all Americans.”

The feds have the option of printing money to pay off bonds. This is not fair to the other municipal levels. This is a power grab, nothing else.

[Mariner]

"This is a power grab, nothing else."

So you believe the banks should be able to continue to show a BS story as a High Quality Liquid Asset?

May as well be in Argentina.

The ONLY fairness issue anyone should be concerned with is whether banks' assets and insurance are sufficient to cover deposits in a moderate run.

Try selling $100mil of LA Muni's on short notice and see what you get for them. Or New York, or Baltimore, or Denver or any other metropolis.

[Born to Conserve]

Oh, I understand now, you live in a perfect world.