Volcker Rule’s CDO Restrictions Prompt Push for Guidance

U.S. banking industry groups are pressing regulators to clarify accounting for certain securities under the Volcker Rule after lenders complained the Dodd-Frank Act measure may force them to take writedowns.

Community and regional banks would have to take losses at the end of this year because of a provision in the rule limiting their ability to hold collateralized loan obligations and collateralized debt obligations, Independent Community Bankers of America President Camden Fine said yesterday.

“Over 300 banks are highly likely to take losses in their capital accounts if they are forced to charge down these securities, which then impacts their regulatory standing at year end,” he said in an interview.

Fine’s group, the American Bankers Association and the Financial Services Roundtable have sent letters to regulators this week seeking guidance before the end of the year on the rule adopted by the Federal Reserve, Federal Deposit Insurance Corp. and three other agencies on Dec. 10. The industry groups are asking whether it requires banks to permanently write down their holdings of CDOs backed by trust-preferred securities, pools of securities issued to raise capital.

“This interpretation already has depressed the value of these investments and, based upon applicable accounting standards, may cause a number of banks to record sizable losses in the fourth quarter,” Richard Whiting, executive director of the Financial Services Roundtable, said in his group’s letter.

Compliance Date

The rule named for former Fed Chairman Paul Volcker, who championed it as an adviser to President Barack Obama, was included in Dodd-Frank as a way to restrict banks’ proprietary trading and other risky bets after the 2008 credit crisis. The Fed has given banks a delay until July 21, 2015, to comply.

The final version approved by the Fed, FDIC, Securities and Exchange Commission, Commodity Futures Trading Commission and Office of the Comptroller of the Currency includes CDOs in the definition of covered funds subject to restriction. The 300 community banks affected by the limitation would face an estimated negative impact of $600 million, Fine said.

U.S. Senator Mike Crapo of Idaho sent the five regulators a letter yesterday also requesting guidance on the CDO issue.

“I respectfully request that you issue prompt appropriate guidance to assist these firms in complying with the Volcker Rule without having to divest these holdings at an exorbitant loss or having to spend millions of dollars to be in compliance,” wrote Crapo, the top Republican on the Senate Banking Committee.

‘Appropriate Vehicle’

Senators Joe Manchin of West Virginia, Mark Kirk of Illinois and Roger Wicker of Mississippi also sent a letter yesterday urging the regulators to help community banks deal with the rule’s impact on trust-preferred securities.

“The Volcker Rule is not the appropriate vehicle for the regulators to revisit how community banks manage their portfolios,” they wrote. “Unless your agencies take action immediately, a sizable number of community banks will have to liquidate their performing pools of TruPs and take an accounting loss -- hurting earnings and capital.” Manchin is a Democrat; Kirk and Wicker are Republicans.

Spokesmen for the five agencies -- Judith Burns of the SEC, Robert Garsson of the OCC, Barbara Hagenbaugh of the Fed, Andrew Gray of the FDIC and Steve Adamske of the CFTC -- declined to comment on the requests for guidance.

Zions Bancorporation

Regional lender Zions Bancorporation (ZION) said on Dec. 16 that the Volcker Rule will force it to get rid of some prohibited holdings at a cost of about $387 million. Utah’s biggest bank can no longer keep trust-preferred collateralized debt obligations issued by banks and insurers until they mature, the Salt Lake City-based company said in a statement.

Zions owned $1.23 billion of bank-issued trust-preferred CDOs as of Sept. 30, the most among all U.S. banks, according to analysts at Sterne Agee & Leach Inc. About 3 percent of U.S. banks held similar CDOs and a sudden sale by Zions could roil the market, Sterne Agee said.

To contact the reporters on this story: Cheyenne Hopkins in Washington at chopkins19@bloomberg.net; Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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