LeoGlossary: Bank Qualified (Municipal Bonds)
Bank Qualified is a designation for a small subset of municipal bonds that provide an economic benefit for commercial banks. Municipal bonds issued by a "qualified small issuer" or an issuer that issues $10 million or less of tax-exempt bonds during a calendar year can be designated as bank qualified.
When commercial banks invest in municipal bonds, provisions in federal law essentially cancel out the benefit of tax-exempt interest. While the bond interest itself is technically tax-exempt, as a result of holding the bonds, banks cannot make deductions they would otherwise take to reduce their overall tax burden. These provisions disincentivize commercial banks from buying municipal bonds, though a commercial bank that invests in bank qualified bonds is able to deduct a portion of the carrying cost of municipal bonds.
To help smaller governments obtain financing for public projects, the federal government created the bank qualified designation. If an issuer does not plan to issue more than $10 million in bonds in a year, it may issue tax-exempt, bank qualified bonds. When commercial banks purchase such bonds, they can take deductions that lower their overall tax burden and make the bonds a more attractive investment.
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