Volcker CLO Delay Would Be No Fix at All, Garrett Says

U.S. regulators should go back to the drawing board to fix rather than postpone banks’ concerns over treatment of collateralized loan obligations under the Volcker Rule, Representative Scott Garrett said today.

“It has been brought to my attention that the Volcker interagency working group will soon propose to extend (by two years) the conformance period for banking entities that currently have a legacy CLO portfolio,” Garrett said in a statement. “Whether it is today or two years from now, this rule will force small and large banks to needlessly write down or hold a fire sale of these performing assets —- potentially creating huge bank losses.”

Garrett, a New Jersey Republican, has joined bank-industry groups in pushing regulators to amend Volcker Rule’s limits on holdings of senior debt securities issued by CLOs. The trading restrictions adopted by five U.S. regulators on Dec. 10 have already been revised to ease handling of collateralized debt obligations backed by trust-preferred securities.

Federal Reserve Chair Janet Yellen said in February that clarification on Volcker Rule treatment of CLOs would be coming “reasonably soon.”

The rule named for former Fed Chairman Paul Volcker, who championed it as an adviser to President Barack Obama, was included in the 2010 Dodd-Frank Act as a way to restrict banks’ proprietary trading and holdings in private equity and hedge funds after the 2008 credit crisis. The Fed has given banks a delay until July 21, 2015, to comply.

Barbara Hagenbaugh, a Fed spokeswoman, declined to comment on Garrett’s letter.