Seeking Alpha

Final bank liquidity rule could sting muni market

  • Maybe not wanting competition for federal government debt, U.S. regulators are set to approve a final liquidity rule next week reportedly excluding municipal bonds from being among banks' high-quality, highly liquid assets. Treasurys and balances held at the Fed, of course, would be allowed.
  • Wells Fargo (NYSE:WFC) - with $47.3B - is the largest holder of municipals among the four largest U.S. banks. It hasn't said how much of that amount is included in its liquidity tally, but did say it was compliant with the international rule and awaiting the final U.S. version.
  • Both banks and local governments had naturally argued to include munis in the final rule. "[This] will almost certainly decrease liquidity in asset markets disfavored by the rule," says ABA President Frank Keating.
  • Muni ETFs: MUB, PZA, TFI, XMPT, PRB, PVI, VRD, RVNU, FMB
  • Financial sector ETFs: XLF, FAS, FAZ, UYG, VFH, IYF, SEF, IYG, FXO, FNCL, FINU, RWW, RYF, FINZ
Comments (34)
  • PalmDesertRat
    , contributor
    Comments (2932) | Send Message
     
    If the banks start unloading munis it will depress prices but help provide a decent yield for the individual investor
    28 Aug, 08:46 AM Reply Like
  • Minutemen
    , contributor
    Comments (1171) | Send Message
     
    If the rule goes into effect, I see banks unloading to the level compliant with the rule, but otherwise maintaining munis for the relative safety and tax-free advantage.
    28 Aug, 08:58 AM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2443) | Send Message
     
    palmdesertrat

     

    The unintended consequence could be that many issues become lower in price but then you have to hold to maturity as a limited or no retail market happens.
    28 Aug, 09:05 AM Reply Like
  • PalmDesertRat
    , contributor
    Comments (2932) | Send Message
     
    I always hold to maturity. Selling munis prior to maturity is a ripoff in any market
    28 Aug, 09:23 AM Reply Like
  • Marek
    , contributor
    Comments (1133) | Send Message
     
    Well said
    29 Aug, 03:50 AM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2443) | Send Message
     
    palmdesertrat

     

    then this might be good for you

     

    good luck
    28 Aug, 10:23 AM Reply Like
  • PalmDesertRat
    , contributor
    Comments (2932) | Send Message
     
    which is why I commented as I did
    28 Aug, 10:26 AM Reply Like
  • lcrupp
    , contributor
    Comments (42) | Send Message
     
    ....and as liquidity goes to zero, the bid/ask spreads will expand. We'll be headed for a 1950's muni market.
    28 Aug, 10:27 AM Reply Like
  • CassandraSees
    , contributor
    Comments (388) | Send Message
     
    Whose ox is going to get gored in this move? Lots of retired people hold muni's for income purposes - - Why the change? Just another slash at the middle class?
    How will the private bank (Federal Reserve) benefit by this move? I do not trust the intentions of the regulators .... Are they expecting local municipalities to starting declaring bankruptcy left and right all over America???
    28 Aug, 12:23 PM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2809) | Send Message
     
    Anyone holding munis for income purposes will be unaffected by this. In fact, if retired people roll their maturing bonds, they may benefit.
    28 Aug, 12:49 PM Reply Like
  • User 21587171
    , contributor
    Comment (1) | Send Message
     
    It is consistent with the US Govt (and the Fed's) wish to favor the securities that THEY are selling. This is a time-honored way for a government that is in a large amount of debt to pay down its debt. In addition, if they maintain the inflation rate at just a bit higher than the treasury rate, they can pay down the debt with slightly cheaper dollars. This in effect slowly drains savers to pay down the debt.
    And so, you are right, since the middle class are the savers in this picture.
    The EU is doing the same thing, as is Japan.
    29 Aug, 09:08 AM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2809) | Send Message
     
    Faux-news opinions aren't proof 2158717. They're not even evidence.
    29 Aug, 09:49 AM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2443) | Send Message
     
    Cassandrasees

     

    Step back for a second, Muni's are controlled by politician's who are not known for making good decisions. Many of the bonds contrary to public opinion are for a specific entity or a specific project and are not covered by the tax base. Think of Detroit in general. If you own G.O. bonds you have in theory the full taxing power of the political sub division. If you own a river authority in the west the asset is drying up. For that reason a muni bond could be a triple AAA rated but we all now know, how well MBS that were triple AAA faired. I happen to be a senior citizen and I don't own any Muni's because my economics teacher (1966)said that it was foolish to buy because the interest rates were never high enough
    in his opinion. He believed that the extra income/growth of good stocks would crush the foolish idea of tax free when the math was actually done.
    28 Aug, 12:45 PM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2809) | Send Message
     
    "Maybe not wanting competition"

     

    Wins my vote for the least likely speculation of the day. Fed can't go bankrupt (unless crazy people decide to intentionally default). Munis don't control their own currency so they're clearly more risky. Have we already forgotton Jefferson County, Detroit, Stockton?
    28 Aug, 12:53 PM Reply Like
  • Left Banker
    , contributor
    Comments (2121) | Send Message
     
    Every time the subject of muni bonds comes up someone is sure to raise the specter of Detroit or Stockton. Truth of the matter is that nothing short of treasury bonds that is safer than munis.
    28 Aug, 12:59 PM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2809) | Send Message
     
    Agree with you in general, LB. I own a leveraged muni fund and like it very much. But that's not what's under discussion here. It's bank liquidity rules. If banks have carte-blanche on munis, fine, but that shouldn't be considered risk-free liquidity.
    28 Aug, 01:02 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2443) | Send Message
     
    left banker

     

    I think with the hundreds of defaults or haircuts over the years of muni versus good corporate bonds I would differ. I believe that the new rules are taking this situation in account.
    28 Aug, 01:08 PM Reply Like
  • Left Banker
    , contributor
    Comments (2121) | Send Message
     
    To:TexasNYC Banker
    Re: hundreds of defaults or haircuts over the years of muni versus good corporate bonds

     

    Oh? Let's see: http://bit.ly/1pmtya1

     

    Over which years do you speak?
    28 Aug, 01:50 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2443) | Send Message
     
    left banker

     

    you might notice the basis of the chart is Baa not all MUNIs.
    Oppenheimer is cherry picking the middle market.

     

    Washington Public Power Supply System in the 80's or the NYC bonds
    of the 1970's would be a great starting places.
    both required haircuts but they were technical defaults of billions.
    I also said versus good corporate bonds which means no B's
    you might also look at Puerto Rican muni bond at the moment.
    When it tips it will be ugly.

     

    note it's NYCTexasBanker
    28 Aug, 02:26 PM Reply Like
  • Left Banker
    , contributor
    Comments (2121) | Send Message
     
    Right. Washington Public Power Supply System in the 80's or the NYC bonds
    of the 1970's ... So, who's cherry picking?
    28 Aug, 03:14 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2443) | Send Message
     
    left banker
    Over which years do you speak?
    Washington Public Power Supply System in the 80's or the NYC bonds
    of the 1970's would be a great starting places.
    28 Aug, 04:04 PM Reply Like
  • Phr3d
    , contributor
    Comments (242) | Send Message
     
    Regardless of the wisdom, banks have always been 'encouraged' to invest in their local communities, promotes synergy no matter how you slice it. Over-simplification: if the money-tree isn't vested/interested in the local economy, who Will be?
    D.C.?
    I cannot see how doing an about-face on this through re-regulation can help that synergy, or much of anything in my narrow view.
    28 Aug, 03:45 PM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2809) | Send Message
     
    Banks can still invest (and will), even if the rules go through in strictest form which is unlikely. They just won't be able to count at least some of those investments as being fully liquid.
    29 Aug, 12:31 AM Reply Like
  • Phr3d
    , contributor
    Comments (242) | Send Message
     
    Well, that is kinda' what I am getting at - the liquidity Must produce some returns, and the choices are few.. This seems rather like, "you can only invest this much in local, the no-longer approved for liquidity funds will now invest in Fed."

     

    I already admitted my narrow view, but this smacks of the rule-makers obliquely benefiting from their rules. I call bit<cough>shull.. and wish media pundits would ask the question, as the sector's view is being summarily ignored.
    29 Aug, 01:52 AM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2809) | Send Message
     
    The choices are not "few". Banks will still invest in munis. Watch and see.

     

    btw, PCQ, which was already high, has gone up even further since this news. I use it as an example because it's the muni fund I choose to invest in.
    29 Aug, 09:54 AM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2443) | Send Message
     
    S D N S
    banks will reduce their investments in muni and will also be much more hands on, therefore for a certain group of Munis the market will go flat.
    29 Aug, 10:45 AM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2809) | Send Message
     
    I'm not convinced of that. It's unlikely the feds will do anything drastic here. They're already looking to modify the rules (which I predicted would happen in my comment above). See WSJ: http://bit.ly/1ll5oeM

     

    Everyone always over reacts to news like this and thinks the sky is falling. Regulators typically relax the rules to near trivial (usually inadequate) changes. Happens nearly every time. Then we have another crisis and the same chicken littles who cried the sky would fall if a bank were ever regulated run around crying about how the regulators are worthless. Gosh, they must all be bribed.
    29 Aug, 12:03 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2443) | Send Message
     
    S D N S
    Actually no one cares whether you are convinced or not, Should that rule go into effect banks will need to rearrange the deck chairs the way the regulator want them to do.
    Having made several trips to our branches in California I can see why your statement how the regulators are worthless is true. We all know from hundreds of articles how inept the political sub-divisions are. You should take the time to read the entire DODD FRANK REGULATIONS.
    Upon completion you can tell us just how good or bad they are and in addition you won't have to make any unsubstantiated claims
    29 Aug, 02:13 PM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2809) | Send Message
     
    "Actually no one cares whether you are convinced or not"

     

    If you don't care that you're completely unconvincing, good for you! You're doing an awesome job at not presenting a shred of evidence and even going the bonus mile of ignoring what evidence there is. Keep up the great work! Maybe throw in more personal insults because that's a good way to be less persuasive. Perhaps add a bit more mumbo jumbo and sprinkle a few more unsubstantiated claims if you feel the need to go even further towards the ultimate goal of not persuading anyone ever. I'm convinced you can do it ;-)
    30 Aug, 05:36 AM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2443) | Send Message
     
    SDNF
    OK! TRY logic. Right know I get capital credit for Munis. If I don't get that credit why hold them. I also said for you to read Dodd Frank because you said Regulators typically relax the rules to near trivial. I made no unsubstantiated claim, I said what would happen if the FED doesn't give them credit and your article from WSJ said the politician's are try to stop the new rule because they realize cheap funding will be over.
    Again I not trying to convince you. Living in California will be a challenge all on it's own if the Physics got it right.
    30 Aug, 09:34 AM Reply Like
  • SanDiegoNonSurfer
    , contributor
    Comments (2809) | Send Message
     
    "If I don't get that credit why hold them."

     

    Why hold anything, then? Banks make plenty of investments that don't count as liquidity. Plus you're going to continue getting capital credit on certain munis at least. (Have you actually sold all your muni holdings yet, btw? If not, why not?)

     

    Dodd-Frank is legislation, written by Congress. Congress is a legislative body, not a regulatory agency. Congress does not promulgate rules. Federal agencies do that. You really should find out more about how regs are promulgated before you assume everyone but you is ignorant. And yes, I'm familiar with Dodd-Frank (interesting you'd just assume I'm not).
    30 Aug, 01:49 PM Reply Like
  • NYCTEXASBANKER
    , contributor
    Comments (2443) | Send Message
     
    SDNS
    first capital is not liquidity. Second regulators can not make regulations unless specified by legislation. I did not assume you were not familiar Dodd Frank. I asked you to read it so you could make relevant statements, which you have done yet.
    2 Sep, 01:43 PM Reply Like
  • Marek
    , contributor
    Comments (1133) | Send Message
     
    Munis will do fine, because of their high yield they will enjoy unusual popularity, and quite the reverse from needing liquidity, they will be sought for their VALUE. Banks may not want the competition, but that does not mean Munis need the banks! And even the leveraged muni funds are a source of collateral...just check the always wrong consensus of economists, who still all think rates are headed up, whilst rates have been headed down down down. 10 year Treasury will have a 1 handle before it sees 3.
    29 Aug, 03:36 AM Reply Like
  • Tod -Idaho
    , contributor
    Comment (1) | Send Message
     
    The socializing of any loss and privatizing of any gain continues!

     

    Too bad that a million individuals can't raise enough money to be of interest to Republican or Democrat members of Congress.
    29 Aug, 07:14 PM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector