“(Reuters) – Some public agencies that rely on the municipal bond market for financing fear that a landmark financial reform rule will cripple their ability to sell bonds and make it more expensive to raise money for crucial services.
The Volcker Rule was designed to curb the risks that banks take with depositor dollars, a practice known as proprietary trading. But the rule risks ensnaring public agencies ranging from housing agencies to hospital authorities because the way muni bonds are sold and traded results in banks risking their own capital — the very practice banned under the Volcker Rule.
And although the rule, a key component of the Dodd-Frank reform law passed in the wake of the 2008 financial crisis, did include an exemption to ensure that state and local governments would still be able to raise money in the municipal bond market, it left a gaping hole.
As a result, state and local authorities are worried that the rule will inhibit banks from underwriting bonds and trading, inadvertently driving up water and sewer bills, delaying public transportation projects and making affordable housing scarcer unless changes are made.
The rule exempts about 60 percent of municipal bonds from the restrictions on banks’ proprietary trading.
Bonds issued by states and their political sub-divisions – such as counties and cities – will be excluded from the ban, but debt issued by public agencies or authorities would be subject to the restriction.
“It could have a very detrimental effect on trying to make the investments in public infrastructure that many of us have felt could be and should be the core of economic recovery,” said Washington State Treasurer James McIntire, who otherwise supports the Volcker Rule….”
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