Yellen made the remark in response to a question from Sen.
"What is the justification for excluding these municipal securities when other types of debt, including foreign sovereign debt, are covered?" Hagan asked, adding, "It seems like a strange outcome to me for the debt of some foreign countries to be treated more favorably than the AAA-rated debt of states like
Yellen said the rationale for excluding munis is that their liquidity "is substantially lower than any of the assets that are included on that list" of HQLA.
Hagan asked her to consider the muni exclusion's impact. Yellen said, "We will look at those comments."
Banks, broker-dealer groups, issuers and others have all adamantly urged that munis be excluded from the proposed rules, which are designed to create a standardized minimum liquidity requirement for large and systemically important banks and other financial institutions. The proposed rules would require these institutions to maintain a minimum liquidity coverage ratio, defined as the ratio of HQLA to total net cash outflows over a 30-day period of stress.
But the firms, groups, issuers, and even Fitch Ratings have all warned that excluding munis as HQLA will cause banks to make fewer investments in munis, decrease demand and liquidity for munis, while increasing borrowing costs.
The regulators asked how much time it would take to liquidate a
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