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Changes in ‘Liquidity’ rules could impact local government

Next month, regulators at the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency will meet to finalize rules that will likely impact state and local governments.

During the 2008 financial crisis, markets froze due to a lack of liquid assets. In an effort to safeguard against that, regulators are expected to mandate that large banks have enough “high-quality liquid assets” on hand to operate in a crisis. But municipal bonds issued to state and local governments will not qualify as “high-quality assets” under the new regulation.

General obligation bonds had a 0.03% percent default rate last year, leaving many state and local officials upset over this decision. While there is a significant push to lobby against the rule change that could potentially increase borrowing costs for infrastructure, it remains unclear if there will be a significant impact on the market.

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