The American Bankers Association is not happy with how regulators addressed concerns over how the Volcker Rule would affect community banks. Now, the industry trade group is threatening to take the matter to court.
Banks have long been lobbying to shape or water down the Volcker Rule, the provision intended to deter banks from making risky bets with their own money, in hopes of avoiding the need for future bailouts of the financial system. After much delay, five federal agencies approved the final rule this month, bolstering some provisions but leaving others open to loopholes.
In a letter Monday, the association said it would file a lawsuit challenging the rule, unless regulators immediately suspended a provision that could force regional and community banks to divest themselves of an investment in collateralized debt obligations backed by trust preferred securities, known as TruPs.
TruPs are preferred securities that are issued mainly by banks and insurers and have both debt and equity characteristics. Before the financial crisis, TruPs issued by regional and communities banks were often pooled together into C.D.O.’s that were sold to other banks and institutional investors.
The trade group sent the letter to the Federal Reserve chairman, Ben S. Bernanke; the Federal Deposit Insurance Corporation chairman, Martin Gruenberg; and the Comptroller of the Currency, Thomas Curry. The group warned that the provision, if left unchanged, would cause “imminent and irreparable†harm to some banks.
Last week, regulators tried to accommodate the concerns of the banking industry by issuing guidance that said regional and community banks need not automatically treat so-called TruPS C.D.O.’s as prohibited investments that must be shed under the Volcker Rule. The regulators issued the guidance in response to lobbying by the A.B.A. and a decision by Zions Bancorp of Salt Lake City to take a $387 million charge to rid itself of a portfolio of those C.D.O.’s.
In the guidance, issued Dec. 19, the regulators said banks should review the structure of each C.D.O. before determining whether the security was considered a prohibited “covered fund†under the rule and needed to be sold.
The A.B.A. said the regulatory guidance did not go far enough in clarifying the issue and the group said it could sue over the provision as soon as the end of this week.
In an interview on Monday, Wayne Abernathy, the A.B.A.’s executive vice president, said that the guidance issued by the regulators would not do much, and that most banks owning TruPS C.D.O.’s would still probably have to sell them and take a charge. Mr. Abernathy said the association was looking for a determination that TruPS C.D.O.’s are not covered by the Volcker Rule.
Banks have until July 21, 2015, to divest themselves of risky assets under the Volcker Rule, but can get an extension from the Federal Reserve if necessary.
