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ICBA's Letter to Regulators: Volcker Definition of “Covered Funds” Puts Community Banks at Risk

To the nation’s community bankers,

This morning Cam sent the following message to federal regulators at the FDIC, Federal Reserve and Office of the Comptroller of the Currency on ICBA’s deep concerns with the impact of certain provisions in the Volcker Rule that could create severe unintended consequences for hundreds of community banks. This provision released just last week could require many community banks to take unanticipated losses on their holdings of collateralized debt obligations (CDOs) backed by bank-issued trust-preferred securities (TruPS).

Despite yesterday's release by federal banking regulators of frequently asked questions on the regulatory treatment of these investments, there are many underlying questions that remain unanswered for community banks that could potentially be affected by the rule. ICBA will continue working with the regulatory agencies and Congress to address the issue.

Bill and Cam

Good morning,

To say that ICBA is dismayed at the so-called “covered funds fix” would be a gross understatement. Do any of you seriously believe that when Chairman Volcker proposed his rule that he had hundreds of small (under $1 billion in assets) banks in mind? Do any of you seriously believe that Congress intended to hurt scores of community banks that did nothing more than play by the rules? I suspect not.

The banks most damaged by your definition of “covered funds” are not the Wall Street megabanks that triggered the rule in the first place—NO! It is the bank in Mississippi that is looking at taking a 30 percent hit to its capital account, or the bank in Florida that has been under an order for some time, finally crawling out from under the order, only to take a multi-million-dollar hit to capital—all because they bought TruPS and certain other securities in good faith and according to the rules. And now the regulatory authorities suddenly change the rules at the 11th hour, giving these banks, and hundreds others, no time to adjust, prepare or absorb the hit. And while the megabanks will barely feel anything, and in some cases actually benefit, community banks, as always, take it in the teeth. I know of two cases where these hits could be fatal.

And while I do not subscribe to this view, I must say that the prevailing mood and belief in the community banking sector is that the timing of the announcement of the final rule was no accident. And, given our conversations with officials in your agencies, is it any wonder that banker perceptions are what they are? And these perceptions are fueled and exacerbated by the seemingly cavalier attitude of your staffs in regard to the damage that your definition of “covered funds” will do to several hundred community banks. When our bankers read in commentaries issued by your agencies and hear your officials say on conference calls, “well, not too many banks are affected by this rule,” what community bankers hear are officials who are either tone deaf or don’t really care, and whose attitude is seemingly summed up in the phrase, “let them eat cake.”

How would these officials like it if suddenly and surprisingly their personal assets were severely reduced or wiped out, or bonuses withdrawn, or dividends taken away because some faceless official arbitrarily defined a statute in such a way that severely damaged them financially—and personally? Well, that is the reality that hundreds of privately held bank owners are facing at Christmastime. This misguided interpretation of this section of the Volcker rule is hurting real community banks, real bank owners and investors, and their families and communities. And all we get from your agencies is “well, not too many banks are affected.” Put yourself in their place and tell me how you think that and similar phrases would sound to you?

It is still our hope at ICBA that your agencies will act to relieve hundreds of community banks from taking serious and unwarranted hits to their capital accounts and balance sheets. I can assure you that ICBA, and the more than 6,000 community banks we represent, will continue to vigorously work on their behalf with your agencies, Congress and the administration to see to it that community banks are not arbitrarily disadvantaged and hurt by a rule that was never intended to apply to them.


Camden Fine

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