Fed approves rule allowing banks to use munis as crisis buffer

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The Federal Reserve has given final approval to a rule that will let banks include investment-grade municipal bonds among the assets they use to meet regulatory requirements to ensure they have sufficient liquidity to weather a crisis.
The Fed and other US financial regulators adopted the liquidity coverage ratio requirement in October 2014 as a response to bank deficiencies highlighted during the 2008 financial crisis.
The central bank split with the other agencies in moving to include munis in the rule, which requires large banks to hold enough high-quality liquid assets to get through a 30-day period of financial stress.
The central bank, which announced its completion of the rule in a recent statement, said it relied on an analysis that suggested certain munis should qualify because they have liquidity characteristics similar to assets such as corporate debt securities.
The rule, which takes effect on July 1, applies only to Fed-supervised lenders subject to the liquidity coverage ratio requirement.
The Fed, which is the central banking system of the US, was created on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907. Over time, the roles and responsibilities of the Federal Reserve System have expanded, and its structure has evolved. Events such as the Great Depression in the 1930s were major factors leading to changes in the system.
In 2015, the Federal Reserve made a profit of $100.2 billion and transferred $97.7 billion to the US Treasury. The primary motivation for creating the Federal Reserve System was to address banking panics while other purposes are stated in the Federal Reserve Act, such as “to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the US, and for other purposes”.

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