Not So Fast on Volcker Rule, Regulators Tell Smaller Banks

It didn’t take long for the financial industry to get bank regulators to make an exception to the Volcker Rule when it comes to limiting risk-taking by smaller banks.

Just three days after Zions Bancorp, the Salt Lake City regional lender, took a $387 million charge to rid itself of a portfolio of trust-preferred collateralized debt obligations in the wake of the adoption of the Volcker Rule,  regulators said other banks need not necessarily do the same.

Bank regulators on Thursday issued guidance saying that C.D.O.’s backed by trust-preferred securities, or TrUPs, need not automatically be considered the kind of investments that banks are forbidden from holding under the Volcker Rule. The regulators said the banks should review the structure of each C.D.O. before determining whether the security was considered a prohibited “covered fund” under the rule.

The joint guidance by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency was issued in response to concerns raised by a number of community banks and banking associations about the whether the Volcker Rule was intended to limit banks from holding investments in TruPs C.D.O.

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 a regional and communities banks were often pooled together into C.D.O.’s that were sold to other banks and institutional investors.

The Volcker Rule, inspired by Paul A. Volcker, the former Federal Reserve chairman, is 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. The rule was intended to mainly limit risk taking by large Wall Street firms often deemed too big to fail by regulators.

Zions said on Monday that it was taking the noncash charge and putting its entire portfolio of TruPs C.D.O.’s up for sale because it believed the securities would be considered “disallowed investments” under the Volcker Rule. The bank said it was surprised by the final language of the rule, approved this month by regulators, which seemed to include those securities under its purview.

The bank, based in Utah, also made an adjustment for the accounting treatment it had used for the securities, which slightly reduced Zions’ ratio of common equity capital â€" a measurement of a bank’s fiscal strength.

It was not immediately clear what Zions would do in light of the new regulatory guidance. A bank spokesman did not immediately return a request for comment.

Before taking the charge, Zions had classified the TruPs C.D.O.’s as securities “held for maturity,” in the expectation they would eventually recover in value. In reclassifying them as securities for sale, the bank had to take a charge for pricing the securities at fair value, even though it did not plan to immediately sell them.

Banks have until July 21, 2015, to divest themselves of risky assets under the rule, but can get an extension from the Federal Reserve if necessary.

But in the guidance, regulators said that even if a TruPs C.D.O. is structured in such a way that bank must sell it under the Volcker Rule, an institution might be able to restructure the security before the July deadline.

Frank Keating, president of the American Bankers Association, said in a statement that the trade group “is dismayed that the regulators have not found a resolution to address the disruptive consequences of the Volcker Rule on community banks.”