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 on to 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 meant to rein in risk-taking by big Wall Street banks and not to result in a financial hit to smaller ones.
Timeline
Documents
VideoThe 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 association’s initial response to the revised provision was favorable. Frank Keating, the group’s president, said in a 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.”
In its statement, the association 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 characteristics of both debt and equity, to raise capital. Some of those securities were then 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 in them have been holding on to them in the hope that they will recover in value. The Volcker Rule, if left unchanged, would have forced banks not only to sell those securities but also to 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 completed.
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 Bancorporation, 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.