Federal regulators on Friday once again tried to quiet the controversy about the potential impact of a provision of the Volcker Rule on hundreds of community banks.
The regulators, facing a lawsuit from a banking trade group, said they were reviewing whether the new regulation required community banks to rid themselves of an obscure and complex security and, in the process, take an immediate hit to their capital levels. The regulators said they expected to decide by Jan. 15.
The statement is the latest attempt by regulators to address concerns from community bankers about the Volcker Rule’s effect on collateralized debt obligations backed by trust-preferred securities, a type of security that many small banks invested in before the financial crisis.
A person briefed on the matter said the joint statement from four regulatory agencies, including the Federal Reserve and the Federal Deposit Insurance Corporation, is intended to assure banks and their auditors that the Volcker Rule could be amended to permit small lenders to continue holding the securities, known as TruPs C.D.O.’s.
If small banks were permitted to continuing holding the securities until they recovered in value, the lenders would not be forced to take write-downs and a corresponding hit to their capital levels.
That would constitute a small, but important, victory for the banking industry, which has been actively lobbying to reshape or water down the Volcker Rule. It could also give the banks a foothold as they fight the federal regulatory agencies over parts of the rule, which was initially intended to stop banks from speculatively trading with their depositors’ money.
The Volcker Rule took nearly three years to draft before it was passed by regulators this month.
The statement from the regulators comes days after the American Bankers Association, an industry trade group, filed a motion in federal court in Washington seeking to quickly suspend the provision of the Volcker Rule that would appear to force small banks to sell the securities. In a sign the banking trade group and regulators are trying to reach an agreement, the parties filed a late-night motion with the court that would delay the filing of additional court papers in the lawsuit until Jan. 17. The request would effectively postpone a ruling that had been expected next week until the middle of January at the earliest.
In the lawsuit, the group said 275 small banks would suffer an imminent $600 million hit to capital, making them less likely to lend to consumers and businesses. The trade group said bank auditors might require the banks to rid themselves of the specialized C.D.O.’s if the provision was kept in place.
Frank Keating, president and chief executive of the American Bankers Association, said in a statement that the group “appreciates the regulators taking this important step, and our experts are studying to see if the affected banks indeed find immediate interim relief from this action.”
The provision came into the spotlight after Zions Bancorporation, a regional lender based in Salt Lake City, said on Dec. 16 that it was taking a fourth-quarter charge of $387 million to write down the value of its portfolio of the securities, and was also reducing its regulatory capital levels after changing its accounting treatment for those securities.
It is not clear if any permanent exemption over the provision would apply to Zions, which has about $55 billion in consolidated assets. The typical community bank has under $15 billion in assets, people briefed on the matter said.
A Zions spokesman declined to comment on the latest statement from regulators.