The Federal Reserve’s widening of the eligibility of municipal bonds that can be held by large banks will make state bonds more appetizing, says Connecticut’s state treasurer, who advocated the reform.
The final Federal Reserve rule allows insured municipal bonds – “munis” for short — where the payment of principal and interest is guaranteed by a bond insurer and that otherwise meet the credit rating criteria to be eligible, Treasurer Denise L. Nappier said Wednesday.
It also removes a limitation on a bank holding more than 25 percent of a particular type of bond due in the same year from the same bond issue, both suggestions Nappier said she and her state-treasurer colleagues favored.
“Expanding the eligibility of municipal bonds for this purpose,’’ she said in a statement, “lowers the cost for state and local governments to borrow for critical infrastructure projects such as school construction and affordable housing that create jobs and help grow the state’s economy.’’
The final regulations, however, stopped short of allowing certain high quality municipal bonds to qualify for an even higher status in a bank’s liquidity portfolio, Nappier said.
In addition, she said the regulations did not qualify revenue bonds as permissible securities for banks, but the Federal Reserve said it will continue to monitor the liquidity characteristics of revenue bonds and consider whether certain revenue bonds should be included in the future.
