Bank Liquidity Requirements: Federal Reserve Adopts Final Amendment Permitting Inclusion of Certain U.S. Municipal Securities as High-Quality Liquid Assets for Purposes of the Liquidity Coverage Ratio

Sullivan & Cromwell LLP - April 5, 2016
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On April 1, 2016, the Federal Reserve adopted a final amendment (“Final Amendment”) to its version of the liquidity coverage ratio (the “LCR”) rules to treat certain U.S. municipal securities as high-quality liquid assets (“HQLA”). The Final Amendment was adopted largely as proposed (“Proposed Amendment”), subject to two important modifications insofar as the Final Amendment: (i) eliminates the proposed limitation on the inclusion of municipal securities in amounts greater than 25 percent of the total outstanding securities with the same CUSIP number; and (ii) permits the inclusion of municipal bonds that are insured or guaranteed by a bond insurer so long as, on a stand-alone basis and absent the insurance or guarantee, the security would otherwise meet the requirements of the Final Amendment (e.g., as described below, investment grade, liquid and readily marketable, etc.). The effective date of the amendment is July 1, 2016. Although the LCR rule itself was originally adopted as an interagency rulemaking with substantively identical rules among the Federal Reserve, the FDIC, and the OCC, the OCC and the FDIC have not proposed any revisions to their respective versions of the LCR to treat municipal securities as HQLA. Therefore, at least for the moment, U.S. banking organizations (for example, bank holding companies and certain state member banks) subject to the Federal Reserve’s version of the LCR rules would be able to include these municipal securities in their HQLA calculations, while entities subject only to the OCC’s and the FDIC’s LCR rules would not be permitted to do so.