The House of Representatives last month passed the Economic Growth, Regulatory Relief, and Consumer Protection Act by a vote of 258 to 159 after the Senate approved the bill in March. The bill, which was sponsored by Senate Banking Committee Chairman Mike Crapo, will roll back some key provisions of President Obama’s landmark 2010 Dodd-Frank Act. Once approved, the new legislation will make fewer banks systemically important by raising the amount of assets to $250 billion from $50 billion. By raising the threshold five times, fewer banks would be deemed “too big to fail” under the new guidelines.

In addition to the above, the new legislation will ease the impact of the so-called Volcker Rule, which had restricted U.S. banks from making certain speculative investments.

Under the new legislation, banks will be able to treat some municipal bonds as level 2B HQLAs, which proponents say will help ensure steady financing for state and local governments. The level 2B classification, which also applies to mortgage-backed securities, is a step down from 2A HQLAs. The market was hoping that munis would be placed into the 2A HQLA bracket, which would have put them on the same level as sovereign debt.

The passage of the final bill didn’t come without roadblocks after House Financial Services Committee Chairman Jeb Hensarling insisted on several changes. House Speaker Paul Ryan promised Hensarling that his proposed reforms will be taken up in separate bills if he allowed the Act to pass in its current form.

The bill was applauded by various muni groups, including the National Association of State Treasurers, the National Association of Counties and Bond Dealers of America.

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The bill calls for banking agencies to amend their liquidity coverage ratio (LCR) guidelines to allow more favorable treatment of municipal bonds as level 2B high quality liquid assets. To be classified as such, bonds need to be liquid and investment grade. Since level 2B assets must represent at least 15% of a bank’s total stock, the new rules incentivize financial institutions to invest more in muni holdings, thereby boosting liquidity. Prior to the new rule, municipal bonds were not included in the coveted “high-quality liquid assets” brackets. For investors, the new move makes municipal bonds more attractive.

By making investment-grade municipal debt eligible as HQLA, Congress allows banks to cement their place in the municipal bond market. Although this has long been the case, market participants had argued that Dodd-Frank provisions hurt demand for munis.

The new rules make munis more attractive from the perspective of investors by boosting liquidity in the bond market. This is due to the fact that banks are now able to treat certain municipal bonds as HQLAs when calculating their liquidity ratio. The available liquidity must exceed the required liquidity, which means the LCR must be at least 100%.

The LCR tests whether banks hold enough cash and easy-to-sell assets to cover for short-term shocks in the market. Certain municipal bonds now fall under this bracket, which means they can be sold quickly and without discount during times of stress. In 2016, banks held about $537 billion in muni bonds, up from just $191 billion in 2006, according to the Municipal Securities Rulemaking Board. There’s reason to believe these holdings will grow in the wake of the new legislation.

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Although bond issuers had hoped for a level 2A classification, the new standards are likely to boost cost efficiencies that make the market more competitive. This especially applies to middle-market and small fixed income dealers across the country.

Perhaps the biggest benefactors of the bill are state and local governments that rely on muni bond markets to finance large-scale infrastructure projects. By classifying investment-grade munis as HQLAs, the new legislation will lower borrowing costs for states and ensure they can continue to invest in public infrastructure at an affordable rate. This also aligns with President Trump’s ambitious infrastructure plan to rebuild the nation’s vital transportation arteries. To that effect, the Trump administration is planning a trillion-dollar infrastructure plan that will include a combination of federal and state spending.

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Granting some investment-grade municipal bonds the status of 2B HQLA appears to be a step in the right direction for market participants. However, the general consensus is that further lobbying is required to bring munis under the purview of sovereign debt classification. Although this remains far off for now, Bond Dealers of America and others will continue to advocate for these changes.

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