Toward a better definition of HQLA.

AuthorMcDonald, Dustin
PositionPerspectives - High quality liquid assets

One of GFOA's key priorities is securing support from federal policymakers to ensure that state and local governments are able to make prudent investments that ensure the long-term sustainability of public infrastructure. Unfortunately, on April 1, 2016, the Federal Reserve Board announced that it would adopt a final rule that would classify a very limited number of investment-grade, liquid, and readily marketable municipal securities as high quality liquid assets (HQLA)--an attempt to correct the 2014 Liquidity Coverage Ratio (LCR) Rule, which excludes investment-grade municipal securities in any of the acceptable investment categories for banks to meet liquidity standards.

The damaging effects of not classifying municipal securities as HQLA only increases the challenges government finance officers face in making investments that are at the lowest possible cost to taxpayers while maintaining the deep and stable funding markets available to sell state and local government securities.

While GFOA appreciates the Federal Reserve's efforts to enable some municipal securities to be classified as HQLA, there are at least two reasons to be troubled by this attempt to "correct" the damaging effects of the LCR rule. First, it would all allow investment-grade, liquid, and readily marketable general obligation bonds to be classified as HQLA, but not revenue bonds. Second, the rule is made more restrictive because it...

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