Updated, 7:26 p.m. |
Federal regulators on Tuesday bent to the will of the banking industry and some lawmakers and revised a rule that would have forced community banks to take write-downs on a security that many had invested in before the financial crisis.
The revision to the Volcker Rule, announced late Tuesday by five regulatory agencies, would permit banks to continue to hold onto a special type of collateralized debt obligation.
The Volcker Rule, as approved by regulators in December, would have forced banks to rid themselves of C.D.O.’s backed by trust-preferred securities, or TRuPS. The provision set off an uproar from the banking industry, which said it violated the intent of the Volcker Rule, which was to rein in risk-taking by big Wall Street banks and not to result in a financial hit to smaller ones.
The American Bankers Association filed a lawsuit to block the provision from going into effect, contending it would force smaller banks to immediately write down the value of those C.D.O.’s. Some lawmakers on Capitol Hill also called on regulators to revise the rule to minimize the effect on community banks.
The initial response from the association to the revised provision was favorable. Frank Keating, the group’s president, said in a prepared statement, “Our initial review of today’s action by the regulators suggests that the interim final rule provides a broad exemption for banks holding trust-preferred securities.â€
The association, in its statement, said it would soon make a decision about whether to continue the legal challenge it filed in federal court.
In the run-up to the financial crisis, some banks issued trust-preferred securities, which have both debt and equity characteristics, to raise capital. Some of those securities were than packaged into C.D.O.’s and sold to banks and other financial institutions.
The securities lost much of their value during the financial crisis, and banks that invested them have been holding onto them in the hope that they will recover in value. The Volcker Rule, if left unchanged, would have forced banks to not only sell those securities but recognize the losses on them.
Some bank auditors had said those investment losses might have to be recognized by banks in the fourth-quarter of 2013, which is what prompted the bankers’ association to file its suit and the regulators to move swiftly to address the issue.
The revised provision would apply to any bank that invested in C.D.O.’s backed by TRuPS that were issued by banks with less than $15 billion in assets, which is traditionally deemed the high-water mark in assets for a community bank. The C.D.O.’s must also have been established before May 19, 2010, and a bank must have acquired them before Dec. 10, when the Volcker Rule was finalized.
But that means any large bank that invested in those securities might not have to sell them and take a write-down. That could provide some comfort to Zions Bancorp, the Utah bank with about $55 billion in consolidated assets, which said in December that it was taking a fourth-quarter charge of $387 million to write down the value of its portfolio of such securities and was also reducing its regulatory capital levels after changing its accounting treatment for them.
