Volcker Rule Treatment of TruPS-Backed CDOs Getting U.S. Review

U.S. regulators said they are reviewing whether it would be “appropriate and consistent” with the Volcker Rule to allow exemption of some collateralized debt obligations backed by trust-preferred securities.

The Federal Reserve, Federal Deposit Insurance Corp., Securities and Exchange Commission and Office of the Comptroller of the Currency will address the matter by Jan. 15, the agencies said in a statement yesterday.

The announcement followed an American Bankers Association lawsuit challenging the Volcker Rule, which is primarily designed to bar banks from making risky bets with their own money, on grounds that a requirement to divest some CDO holdings will hurt smaller lenders. The ABA is seeking a court order to block the rule before the end of this year.

“A number of community banking organizations have expressed concern that the final rule conflicts with the congressional determination” that some TruPS be grandfathered, the regulators said yesterday, less than a week after they released a joint statement outlining issues that had to be addressed to determine whether an exemption can be justified.

The earlier statement failed to assuage banks and the ABA, which filed suit in federal court in Washington on Dec. 24. The regulators said yesterday they will evaluate whether exempting TruPS-backed CDOs would be consistent with the relief Congress sought to give community banks under the Dodd-Frank Act.

“ABA 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,” Frank Keating, the group’s chief executive officer, said in a statement.

The case is American Bankers Association v. Federal Deposit Insurance Corp., 13-cv-02050, U.S. District Court, District of Columbia (Washington).

To contact the reporter on this story: Gregory Mott in Washington at gmott1@bloomberg.net

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

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