MBA: Count CMBS in Liquidity Plan

September 14, 2016

The Mortgage Bankers Association is asking the Federal Reserve to include commercial MBS on the list of assets eligible to meet liquidity requirements proposed for insurance companies that are deemed to be “systemically important.”

The pending rules are part of a sweeping Fed plan to subject giant insurers to restrictions similar to those levied against big banks classified as “too big to fail.” In addition to higher capital requirements and new stress tests, affected insurers would have to keep enough highly liquid assets on hand to cover their obligations for up to 90 days, in case regular funding sources dried up.

Eligible assets would generally include U.S. government securities, investment-grade paper issued by government sponsored entities, sovereign foreign debt, corporate bonds and other low-risk assets that are “liquid and readily marketable.” But most securities issued by financial institutions, including asset-backed securities and mortgage bonds, would be excluded under the proposal, which the Fed put out for public comment.

In its reaction, the MBA contended that investment-grade CMBS paper, especially triple-A bonds, should also qualify because it is liquid. “Similar to the corporate debt market, there has been as active secondary market for investment-grade CMBS during periods of robust and stressed market conditions,” MBA associate vice president George Green wrote.

The MBA, whose members include insurance companies, also expressed concern about the potential for unintended consequences stemming from “pverly prescriptive risk management requirements,” which it said could skew “investment decisions based on regulatory compliance purposes versus the most efficient allocation of capital.”

For example, “excluding CMBS from the 90-day liquidity buffer has the potential to dampen insurance-company demand for CMBE for reasons beyond economic decisions,” Green wrote.

“There’s a fair comparison between CMBS and corporates,” Green said in an interview. “They both have active markets in good times and bad.”

A regulatory panel, the Financial Stability Oversight Council, has classified three insurers as systemically important: AIG, MetLife and Prudential. A federal judge subsequently upheld MetLife’s challenge to have the designation removed. The oversight panel has appealed that ruling.

AIG and Prudential both submitted lengthy comment letters calling for substantial revisions and clarifications. They asked for a broader array of assets, including private-label mortgage bonds, to count toward the liquidity threshold.