The proposed regulations would apply a “haircut” to certain securities pledged by pooled institutions, mimicking the requirement for opt-out institutions.  The proposal indicates that the haircuts would alleviate concerns about “liquidity, unreliable and inconsistent pricing and costs to execute sales of municipal securities, particularly in times of market instability.”

We oppose the proposal for the following reasons:

1. Pooled institutions are responsible to collectively cover potential losses of other pooled institutions.  This reduces the liquidity and pricing risks of individual institutions and justifies allowing pooled institutions to count 100% of their municipal bond securities for pledging.  Opt-out institutions are not responsible to cover losses of any other institutions, or receive aid in covering their own losses.  Opt-out institutions pose more risk and it is reasonable to impose a more stringent standard on opt-out institutions.
2. According to the Treasury Board minutes from February, there were 57 pooled depositories that held public deposits of $3.8 billion, 36% of all public deposit balances.  We see this as a large number of institutions that could likely absorb any potential losses from individual pooled institutions.
3. There has never been a loss on a pooled institution.
4. Municipal deposits have been inflated by federal stimulus funds from the American Rescue Plan Act.  Municipalities have until 2026 to spend the funds.  Institutions that hold these deposits need access to their full security portfolio to meet increased pledging demand.
5. Even prior to the pandemic and receipt of federal rescue funds, we, along with many pooled banks, had a high level of liquidity.  There is no liquidity concern.
6. The market for municipal securities is liquid and reflects market value.  Pooled banks are required to pledge based on the lower of book value or market value.  Requiring a haircut on top of a market value penalizes pooled banks unnecessarily.
7. National Bank, and we assume all pooled institutions, employs a reputable agent to provide market pricing on our securities portfolio as of the end of each month.  The agent is audited annually on its pricing methodologies.  In addition to the audit of the agent, each year our auditors independently verify the agent’s pricing on a significant sample of the securities we own.  We do not believe that the pricing of our municipal securities is unreliable or inconsistent.

The concerns cited are not of the level that would indicate the need to adopt the proposed regulation.