Senators Introduce Legislation to Provide Financial Stability to Muni Bonds
Section: Washington Update

Sens. Mark R. Warner (D-VA), Chuck Schumer (D-NY) and Mike Rounds (R-SD) have introduced legislation to allow high-quality municipal debt to be classified at a level equivalent to debt issued by corporations. The bill, S.3404, would amend the Federal Deposit Insurance Act to require the appropriate federal banking agencies to treat certain municipal obligations as level 2B liquid assets. Debt sold by state and local governments is currently excluded from consideration under a rule requiring banks to hold enough highly liquid assets to fund their operations for 30 days. This exclusion may create a disincentive for banks to hold their positions in the municipal-debt market, potentially making it harder for state and local governments to issue bonds to fund infrastructure projects.
In announcing their legislation, the bill sponsors commented:
Sen. Warner: “As a former governor, I know firsthand how critical it is for states and municipalities to issue bonds that fund their basic operations, including the construction of schools, roads and local projects. We must ensure a continued and reliable access to capital markets for our local governments, and this legislation represents a compromise that achieves that while appropriately balancing concerns for the long term stability of our financial system.”
Sen. Schumer: “Municipal bonds are the lifeblood of everything from roads and bridges to schools and hospitals. If banks retreat from the muni-bond market, it could choke off a critical source of investment on which our cities and localities rely. This bill protects the stability of our markets while providing continued access to muni bonds for local governments.”
Sen. Rounds: “Making sure South Dakota and our municipalities have access to capital at the best possible rates is vital for communities to finance important infrastructure projects. Our legislation would allow banks to count qualifying municipal debt as high-quality liquid assets, helping to maintain demand for the debt which would prevent borrowing rates for municipalities from dramatically increasing.”
The legislation is co-sponsored by Sens. Jon Tester (D-MT), Mark Kirk (R-IL), Heidi Heitkamp (D-ND), Tim Scott (R-SC), Joe Donnelly (D-IN), Jerry Moran (R-KS) and David Vitter (R-LA).
Click to view the full text of the bill and its legislative action.