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Volcker Rule

ICBA Urges Agencies to Exempt CDO TruPS from Volcker Rule

Community bank investments in collateralized debt obligations (CDOs) backed by trust preferred securities (TruPS) should be completely exempted from the Volcker Rule, ICBA wrote in a letter to banking regulators on Saturday.

If the agencies do want to make these investments subject to the final rule, ICBA wrote, then they should clearly indicate that position and whether there is a way to make these investments conform to the rule. Until then, regulators should suspend the part of the rule pertaining to CDO TruPS while they resolve the underlying issues, ICBA wrote.

ICBA wrote that while it appreciates that regulators released frequently asked questions on how the Volcker Rule applies to CDO TruPS, the association is deeply disappointed that there was not further guidance on legal questions concerning what is an “ownership interest” in a “covered fund.” ICBA believes there are enough ambiguities and questions about the issue that the agencies should suspend applying the Volcker Rule to CDO TRUPS for 60 to 90 days, the association wrote.

Under the regulators’ FAQs released last week, the agencies outlined the questions many community banks should consider in determining whether they will be forced to divest their TruPS CDOs under the Volcker Rule. The document discusses whether TruPS CDOs are “covered funds” prohibited by the Volcker Rule or can be restructured to not be considered covered funds. It also discusses whether investment in a TruPS CDO constitutes an ownership interest in a covered fund.

The agencies said the FAQs are intended to clarify that banking entities that have holdings in TruPS CDOs are not required to sell these holdings immediately under the final rules, but instead may use the conformance period to determine if they can be brought into conformance by the end of the period, which is July 21, 2015.

However, ICBA said in a national news release last week that the document is not a permanent solution for community banks potentially affected by the Volcker Rule. In a Friday message to the regulatory agencies, ICBA President and CEO Cam Fine wrote that regulators’ misguided interpretation of this section of the rule would hurt community banks, their owners and investors, and their families and communities. Fine yesterday told WINA-AM radio in Charlottesville, Va., that CDO TruPS were never intended to be included in the Volcker Rule.

Regulators recently issued final regulations implementing the Volcker Rule, which bars depository institutions and their affiliates from engaging in short-term proprietary trading for their own account. It also prohibits these institutions from owning, sponsoring or having certain relationships with hedge funds or private equity funds.

While the Volcker Rule includes some key community bank exemptions, it also indicates that CDOs backed by TruPS could be considered prohibited by the rule. This would require all banks, including community banks, to divest their holdings of CDOs backed by TruPS by July 2015 and to immediately recognize the impairment, before year-end 2013, under “other than temporary impairment” accounting standards. If community banks are forced to write these investments down, they may have to do so at “fire sale” prices that would result in a permanent loss of capital, rather than holding these investments to maturity.

ICBA has repeatedly called for the banking agencies to address the implications of the CDO TruPS issue and has also called on Congress to seek a fix and, if necessary, to hold committee hearings on community bank concerns with the issue.

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