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January 30, 2013

Banks’ debt product skirt liquidity rules

US banks led by JPMorgan Chase are offering a new type of debt product that will help them to skirt new rules requiring them to hold war chests of liquid assets.

The new product is known as “callable commercial paper” and is sold by banks on behalf of US municipalities which use it as a type of financing. The callable version is being openly marketed by at least two big banks as a way for them to bypass new liquidity rules, making it cheaper for them to sell the paper on behalf of munis.

Banks often backstop short-term debt sold by US municipal issuers. When the financial crisis struck, many munis found traditional buyers for their short-term debt disappeared, meaning banks had to step in and buy the paper instead.

To mitigate that risk, the Basel Committee of Banking Supervisors has proposed new rules that require banks to hold a portfolio of liquid assets against such short-term credit commitments. Banks have to hold high-quality assets to cover any credit commitments which could be tapped within 30 days.”


Read full Financial Times article here

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