The Volcker Rule was approved just a week ago, but it’s already forcing some banks to come clean about owning the kind of risky securities that the new regulation is intended to prevent banks from investing in.
A big regional lender, Zions Bancorporation, said on Tuesday that it was taking a charge of $387 million to rid itself of a sizable portfolio of trust-preferred collateralized debt obligations and other C.D.O.’s. The bank, based in Salt Lake City, said it was taking the fourth-quarter, noncash charge and putting the portfolio up for sale because it believed the securities would be considered “disallowed investments†under the Volcker Rule.
The bank announced the move just days after federal regulators approved a tougher version of the rule, which is the centerpiece of the Dodd-Frank Act, passed in response to the final crisis. The 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.
Yet, the unexpected announcement by Zions is an indication that the impact of the Volcker Rule will not just be felt at traditional Wall Street firms but at other kinds of banks as well. The move by the lender also reflects the kind of careful analysis other banks may be undertaking as they to understand the provisions of the 71-page rule and its more than 800 pages of supplementary information.
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. The Volcker Rule, however, also required banks to make an immediate adjustment for the accounting treatment they used for the securities, which slightly reduced Zions’s ratio of common equity capital â€" a measurement of a bank’s fiscal strength.
In conference call with analysts to discuss the charge, the chief financial officer of Zions, Doyle Arnold, said the bank was surprised that the final version of the rule required it to divest itself of most of the securities holdings under the section of the rule for “covered investments.â€
“This is not something that we had anticipated, nor do we think we reasonably could have anticipated based on what was in the proposed rule,†Mr. Arnold said. “So we have been studying this very, very intently for the last few days.
Bank analysts said it was not clear how many other banks had as large a portfolio of trust-preferred C.D.O.’s, which have characteristics like both equity and debt. Jason Goldberg, an analyst with Barclays, said in an interview that the Volcker Rule could have other “unintended consequences†for community and regional banks as bankers better digest the rule.
“There are going to be other nuances,†he said.
Shares of Zions closed slightly higher on the day, rising 10 cents to $28.57.
