Live and Let Die: Peeling Back on Municipal Bond Regulation After the 2008 Financial Crisis

Miki, Heita

Municipal bonds have traditionally been considered, rightly or wrongly, mundane assets that require little regulation. However, the most recent financial crisis did not leave municipal bonds untouched. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and liquidity requirements for banks, enacted in response to the 2008 financial crisis, have had far-reaching effects in the banking industry as well as the municipal bond market. While the registration requirements for municipal advisors have garnered much attention, other provisions may negatively impact the liquidity of the municipal bond market and raise the costs of raising capital for municipalities.

This Note focuses on three provisions, all of which increase the cost of raising capital for municipalities without a meaningful improvement in the safety of the banking system: the Liquidity Coverage Ratio, the Volcker Rule, and the Risk Retention Rule. Secondarily, this Note makes mitigating suggestions. This Note concludes that the most liquid municipal bonds should qualify as eligible for high-quality liquid asset status, which would be consistent with international standards. Additionally, exemptions should be granted under the Volcker Rule and the risk retention provisions for tender option bonds.

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November 19, 2019