Merrill research finds people are so stressed
out about managing their money that they would be willing to do the following,
if it meant they never had to manage their personal finances again: give up all
social media platforms forever (41%), cut out carbs, sugar and/or alcohol
(37%), lose access to their smartphone for a month (35%), or move back in with
their parents (25%). Wow, some of those are drastic.
This got us wondering what community banks
might give up to ensure they never again had to worry about liquidity. Speaking
of liquidity, community banks should be among the beneficiaries of a rule change
impacting how the biggest banks calculate their adherence to Liquidity Coverage
Ratios (LCR). The LCR rule generally applies to banks with assets of $250B or
more, but its impact can be seen throughout the industry and at much smaller
sized institutions too.
Recall that the LCR was designed by regulators
(following lessons learned from the credit crisis of 2008) to ensure the
largest banks hold a sufficient reserve of high-quality liquid assets (HQLA) to
allow them to survive a period of significant liquidity stress lasting 30
calendar days. That window is believed to be the minimum period necessary for
corrective action to be taken by the bank's management or by regulators.
Now, after lengthy deliberation over a number
of years, regulators have issued a final rule that amends the LCR rules to
treat certain municipal obligations as HQLA. The final rule added a definition
for the term "municipal obligations," which, consistent with the EGRRCPA, means
an obligation of (1) a state or any political subdivision thereof or (2) any
agency or instrumentality of a state or any political subdivision thereof. In
addition, the interim final rule amended the HQLA criteria by adding municipal
obligations that, as of the LCR calculation date, are both liquid and
readily-marketable and investment grade to the list of assets that are eligible
for treatment as liquid assets.
This means the largest banks can now count
(and therefore buy and hold) as liquid, readily marketable and investment grade
municipal obligations in their HQLA. This should decrease yields on those
instruments and increase prices, as large banks adjust to the new rules and
perhaps reduce lower yielding options such as cash and Treasuries.
Even
better, since the largest banks now have another option for their HQLA, they
won't need to hold deposit rates at higher rates, just to support this
calculation anymore.
If municipal bond prices rise due to this
change, community banks could also be impacted as the equation for current
holdings and attractiveness of future holdings is impacted.
Despite these changes, investing in local
government financing is often viewed as evidence of a bank's commitment to its
community, so that will continue. Clearly, there is much to consider when
reviewing your municipal holdings and deposit pricing, as this change works
through the system.
