Fed proposes letting banks to use some muni bonds as liquidity buffers

U.S. Federal Reserve plans to allow big banks to use certain general obligation state and municipal bonds as liquid asset to meet a regulatory rule aimed at keeping the banks safe during a crisis.

The proposed revised rule released by the Fed on Thursday will to some extent ease the liquidity requirements on large banks. In last September, the Fed released a proposed liquidity requirement rule, requiring large banks to hold high-quality liquid assets ( HQLA) that can be easily and quickly converted into cash during a period of financial stress. At that time, the muni bonds were not included as high quality liquid assets.

The Fed said on Thursday that some general obligation state and municipal bonds can be counted as the HQLA if they meet the same liquidity criteria that currently apply to corporate debt securities.

The proposed rule will not apply to all financial institutions but only large banks with 250 billion U.S. dollars or more in total consolidated assets or these banks'subsidiaries with 10 billion dollars or more in assets.

The Fed said the proposed rule will maintain the strong liquidity standards while providing banks with the flexibility to hold a wider range of HQLA.

But local media reported that other banking regulators in U.S., such as the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, have not agreed to loosen the liquidity rule and said only the Fed had proposed the change.