U.S. financial regulators are examining the rising use of loans to state and local governments that allow public officials to take on added debt without disclosing it to municipal-bond investors.
Officials with the Municipal Securities Rulemaking Board, which writes regulations for the $2.9 trillion tax-exempt bond market, have discussed the issue with the Securities and Exchange Commission, Alan Polsky, chairman of the MSRB, said on a conference call with reporters today.
“The SEC and the MSRB are both concerned about bank loans,” Polsky said.
Standard & Poor’s in July estimated that municipalities may borrow as much as $75 billion from banks this year, while Fitch Ratings has also said localities should disclose information about such direct deals with banks. The MSRB, based in Alexandria, Virginia, said in August that loans could fall under some securities rules. It is urging the SEC to weigh in on the matter.
The loans may leave investors unaware about rising debt obligations that could affect their credit ratings, Polsky said.
“From a market impact, or from a credit-impact standpoint, there’s an important discussion there,” Polsky said. “The concern is that in some cases bank loans may in fact be municipal securities. We feel that guidance from the SEC on this topic would be helpful.”
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