Bank-industry groups and Republican lawmakers called for broader Volcker Rule revisions a day after regulators permitted exemptions for some collateralized debt obligations faulted for obscuring lenders’ capitalization.
Representatives of the Securities Industry and Financial Markets Association and other groups joined House Financial Services Committee members in highlighting the “unintended consequences” of the proprietary-trading rule at a Washington hearing yesterday. Lawmakers and lobbyists alike said the Jan. 14 move to shield some CDOs backed by trust-preferred securities wasn’t enough to protect banks and the public from harm.
“While we welcome the relief provided to certain holders of TruPS CDOs, we believe that regulators must address the larger problem of the inclusion of senior debt securities issued by collateralized loan obligations,” Sifma Chief Executive Officer Kenneth Bentsen said at the hearing. “If this situation is not remediated, corporate borrowers could face higher credit costs and banks will likely suffer unnecessary losses.”
Representative Jeb Hensarling, the Texas Republican who leads the Financial Services Committee, called the hearing to address concerns that the rule named for former Federal Reserve Chairman Paul Volcker is unworkable and harmful to capital markets and job creation. The five agencies that adopted the measure last month released a revision Jan. 14 after the American Bankers Association sued claiming that TruPS-backed CDO restrictions would cost smaller banks $600 million in losses.
The ABA said yesterday that it will withdraw its request for emergency relief.
“We are, however, deferring a decision on dismissal of the litigation to allow time to consult with our membership and finalize our analysis of the impact and implications of the interim final rule,” ABA CEO Frank Keating said in a statement.
Trust-preferred securities, issued by banks and insurers, are hybrid instruments that occupy territory between stocks and bonds. Investors -- including other banks -- are drawn to their favorable tax treatment, and regulators targeted them because they can make banks appear better capitalized than they are.
The exemption gives grandfathering protection to CDOs established before May 19, 2010, and obtained by Dec. 10, 2013, as long as they meet thresholds ensuring they are tied primarily to securities issued by banks with less than $15 billion in assets. As an interim final rule, it will be implemented while the agencies open a 30-day comment period.
In granting the exemption for CDOs, the Fed, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Securities and Exchange Commission and Commodity Futures Trading Commission didn’t address a complaint that the Volcker Rule could also force losses on collateralized loan obligations.
David C. Robertson, testifying on behalf of the U.S. Chamber of Commerce, said the Volcker Rule was too broad in defining ownership in CLOs that would be affected by its limits.
“The regulators, acting without prior notice, far exceeded the requirements of the statute,” said Robertson, a partner at Chicago-based consulting firm Treasury Strategies Inc. Banks could be forced to restructure $70 billion in CLO debt, which could create a “rush to liquidate,” he said.
Representative Maxine Waters of California, the top Democrat on the Financial Services Committee, expressed hope that lawmakers could work together to address the industry complaints over CLOs as they did on the CDOs.
“Both sides of the aisle cooperated and worked to make sure that the regulators quickly addressed the TruPS CDO issue,” Waters said. “Just as we are able to do that, I think that we are able to work with regulators on some of the other issues that have been identified.”
Hensarling said that he will hold another hearing on the Volcker Rule on Feb. 5, and that regulators will appear.