Muni advocates warn of fallout from proposed Basel III capital reforms
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Cities and states have joined a chorus of critics urging federal regulators to revise or halt
In a
“[T]he implementation of these proposed rules would increase the costs to financial institutions that make loans to issuers of municipal debt, and those that underwrite and hold municipal debt in inventory, and will dis-incentivize market makers, resulting in increased borrowing costs and reduced liquidity and stability in the municipal debt market,” the letter said. In addition to GFOA, the comment was signed by the National Association of Health and Educational Facilities Finance Authorities, the National Association of State Treasurers, American Public Power Association, Large Public Power Counsel, Securities Industry and Financial Markets Association, and Bond Dealers of America.
Bloomberg News
The Basel III endgame marks the final phase of the international rules intended to shore up banks after the 2008 global financial crisis. The banking industry has
The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation jointly issued a notice of
Municipal bonds would be treated as so-called posted collateral and subject to certain haircuts, which would increase the cost of capital from 8% to 20% needed to hold it on their books, as Justin Underwood, the founder and managing principal of Flat98 Strategies & Communications, LLC,
In their comment letter, industry groups asked regulators to reconsider the proposed treatment of muni bonds “in light of their tax-exempt status” and “reduce the risk weights and loss-given-default rates” considering the market’s traditionally low default rate.
“If these key details are not assessed, all these issues will make the financing of U.S. state and local government and non-profit borrowers’ capital projects more expensive,” the letter warned.
The advocates also asked regulators to reconsider increasing capital requirements for commodity hedges, as the cost would likely be passed down to cities and states that use banks as counterparties to derivatives contracts for energy commodities.
“Whether these commodities are for power generation, for institutional use, or for transportation, we do not believe that increasing the capital requirements for these contracts will increase financial system stability, but we are certain that it will increase the cost of managing these risks – costs that will ultimately be passed on to communities though higher charges for services,” the letter said. The proposed regulations would favor entities that are publicly traded, which would exclude states and cities, the groups added.
The proposal drew a slew of negative letters before the public comment period closed, including from Republican lawmakers, state and local officials that warned it would hurt low-income Americans and other stakeholders. The California Public Employees’ Retirement System, the nation’s largest pension fund, said the proposal would unfairly treat “highly regulated, transparent, low-risk public pension funds that offer significant transparency and accountability (and exhibit low actual credit risks)” as having higher risk than “many issuers of publicly traded securities that have materially higher actual credit risks.”
The American Securities Association said in its
“inexplicably codifies the regulatory favoritism of certain assets,” and that municipal bonds would likely be “severely affected.”
“According to some analyses, the cost of capital for holding municipal bonds could increase by as much as 20% if the proposal were adopted,” ASA said. “Institutions subject to Basel III will therefore be dis-incentivized from trading or holding these bonds,” the ASA said. “The proposal should be abandoned in its entirety.”
