WASHINGTON (Reuters) - A U.S. Democratic senator on Tuesday urged the Federal Reserve and other bank regulators to revamp the treatment of municipal bonds in recently finalized rules aimed at making sure banks can survive a cash crunch.
Bank regulators finished rules on Sept. 3 that require big institutions such as JPMorgan Chase and Citigroup to hold a certain amount of highly liquid, or easily sellable, assets.
Assets such as U.S. Treasuries count toward the buffer but municipal bonds do not.
Senator Chuck Schumer of New York, the No. 3 Senate Democrat, said that could have a "chilling effect," reducing banks' interest in debt issuances by local and state governments.
He said New York City, which he said is the second-largest U.S. issuer of municipal debt, would struggle to finance infrastructure projects if banks did not invest in its bonds.
"These debt issuances from certain state and local municipalities are considered high quality liquid assets by the markets and they should be treated as such under the rule," Schumer said in the letter.
The rules are aimed at prevent the problems experienced during the 2007-2009 financial crisis, when many institutions were caught without enough cash on hand to meet collateral needs and customer withdrawals.
Regulators said when they finalized the new liquidity requirements that they were studying whether certain local governments' debt was liquid enough that it should be counted.
Cities and states said leaving them out of the liquid asset buffer would raise their borrowing costs, making it more difficult to fund schools, hospitals and new buildings.
Schumer said on Tuesday that he appreciated that regulators were willing to take a closer look at individual municipalities' debt and asked them to tell him when to expect a proposed rule incorporating municipal bonds into the liquid asset buffer.
(Reporting by Emily Stephenson; Editing by Cynthia Osterman)