In a rare bipartisan moment of the 2016 election season, a group of U.S. Senators introduced a bill late last month that would let municipal debt count among “High Quality Liquid Assets” (HQLA), the buffers banks must hold against liquidity shocks since the last financial crisis. The key argument for the bill cited in the news media was not about bank liquidity, but rather about the need to preserve market access for states, cities, and counties. Anointed as HQLA, municipal debt would gain preferred access to a special group of buyers, the country’s biggest financial institutions. Foreign governments made a similar argument just a few years earlier, when they lobbied U.S. regulators for exemptions from the proprietary trading ban of the Volcker Rule, so as to preserve liquidity in their debt markets. [1] In the late 1990s and early 2000s, the desire to preserve liquidity in yet another vital market—overnight repurchase agreements (repos)—animated the push for bankruptcy safe harbors, which put repos backed by an ever-widening range of collateral ahead of other claims, and effectively beyond the reach of bankruptcy law. The repo market boomed, until it collapsed in 2007-2008.
Posted by Anna Gelpern, Georgetown University Law Center, and Erik F. Gerding, University of Colorado Law School, on Tuesday, October 11, 2016
Editor's Note: Anna Gelpern is a Professor at Georgetown University Law Center, and Erik F. Gerding is a Professor at the University of Colorado Law School. This post is based on their forthcoming article.
