Banking Group Drops Suit Against Volcker Rule

The American Bankers Association announced on Wednesday that it was dropping its lawsuit to block parts of the Volcker Rule from going into effect after regulators modified what the group found most objectionable.

The association’s move was not unexpected. In January, the five regulatory agencies responsible for carrying out the Volcker Rule relented to industry pressure and changed provisions that would have forced community banks to take write-downs on a type of security that many had invested in before the financial crisis. The banking industry argued that the original provisions violated the intent of the Volcker Rule, which was meant to curb risk-taking by big Wall Street banks, and would instead inflict financial pain on smaller ones.

Under the original terms, community banks would have been forced to shed collateralized debt obligations backed by so-called trust-preferred securities. Under the modified terms, banks will be allowed to hold onto them under certain conditions.

“After consulting with our membership and concluding our analysis of the impact of the regulators’ interim final rule, we have decided to dismiss our litigation,” Frank Keating, the chief executive of the association, said in a statement. “The interim final rule has allowed many banks to avoid taking hundreds of millions of dollars in unnecessary write-downs and has helped to minimize the cost and compliance burden for those that are affected.”

In its lawsuit, filed in December, the trade group contended that 275 small banks would suffer an imminent $600 million hit to their capital and make them less likely to lend to consumers and businesses.

Wall Street has been outspokenly critical of the Volcker Rule, a centerpiece of government regulation meant to prevent another financial collapse by prohibiting banks from making risky bets with their own money. The rule was approved in December, and many banks are now figuring out how to comply with the new provisions as they take effect. Goldman Sachs, for instance, announced that it had created a special “Volcker Rule” unit to ease itself into the new guidelines.

In its statement, the association said that some banks’ “legitimate business activities” would still be harmed by the Volcker Rule as it stands now and that it was “imperative” that regulators address remaining concerns.