Direct Purchases of State or Local Obligations by Commercial Banks and Other Financial Institutions

Prior to 1986, commercial banks were among the largest buyers and holders of tax-exempt obligations. With the passage of the Tax Reform Act of 1986 (the “1986 Tax Act”), the ability of commercial banks to deduct interest expense related to tax-exempt income was limited, and, as a result, the appeal of tax-exempt obligations to commercial banks diminished. In the years following 1986, banks participated in the municipal market primarily through the issuance of direct pay letters of credit (“LCs”), standby bond purchase agreements and other forms of credit enhancement supporting variable rate demand obligations (“VRDOs”) with short-term tender features. While there was still significant participation by banks as lenders at the local level, those financings were generally limited to smaller issues with shorter terms.

The complete article, Direct Purchases of State or Local Obligations by Commercial Banks and Other Financial Institutions, was first published by the National Association of Bond Lawyers in July 2017.