Please see the following Wall Street Journalstory on ICBA's efforts urging regulators to issue guidance that the Volcker Rule does not require banks to permanently write down their holdings of collateralized debt obligations (CDOs) backed by trust-preferred securities (TruPS). ICBA today called on Congress to help ensure federal banking regulators issue this critically needed guidance.
U.S. Regulators Working On Guidance to Clarify Volcker Rule's CDO Provision
Guidance May Only Be Temporary Reprieve For Banks Holding CDOs, CLOs
By Ryan Tracy
Updated Dec. 18, 2013 3:48 p.m. ET
WASHINGTON—One week after releasing the more than 900-page Volcker rule, U.S. banking regulators are considering issuing guidance to address concerns about the rule's impact on some small and midsize banks, according to people familiar with the matter.
The new guidance, which could come from banking regulators, comes amid worries that banks will take a hit to their capital levels as a result of a provision some have interpreted as prohibiting firms from investing in certain financial products known as collateralized debt or collateralized loan obligations.
The regulatory guidance might give banks a temporary reprieve but it is unclear whether regulators will lift the ban on those types of investments, the people familiar with the matter said. Banks may have to do their own analysis to determine if they are eligible for exceptions from the ban, one of the people said.
Some banks have stakes in so-called CDOs or CLOs, which are bundles of mortgages, corporate loans, or other debt. A fact sheet for community banks, issued with the larger Volcker rule last week, says banks that bought into the bundles of loans, rather than organizing the investments themselves, will have to divest them as part of the rule's ban on certain types of bank risk-taking.
That could mean a write-down for some institutions just before a year-end accounting deadline. Zions Bancorp. of Salt Lake City said Monday that it would have to sell some CDOs and take a $387 million charge.
Camden Fine, president of the trade group Independent Community Bankers of America, said about 300 banks are affected by the provision and could be forced to unload the assets at a loss, potentially depleting their capital.
In a letter Monday, he asked a trio of U.S. banking overseers—the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve—to make it clear that banks won't have to write down the assets permanently. "What [the regulators] are telling me is that they're working on a solution. Their goal is to attempt to get the banks through the end of the year without having to take write-downs," Mr. Fine said in an interview.
That leaves open the question of whether banks will be able to continue to hold the assets going forward, even if they avoid a year-end hit to their accounts. For a bank, "you can't just ignore this because they tell you to forget about it for two weeks," said Jaret Seiberg, an analyst at Guggenheim Securities.
Alternatively, regulators could decide that some investments in CDOs and CLOs constitute debt holdings, rather than equity, and so don't come under the Volcker rule, Mr. Seiberg said.