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Regulators Respond to ICBA Pressure on Volcker Rule

Interim Final Rule Exempts Qualifying TruPS CDOs

Federal banking regulators today responded to ICBA’s repeated calls for them to take action on a Volcker Rule provision that could have required all banks, including hundreds of community banks, to divest their holdings of certain securities by July 2015.

Following ICBA’s tireless efforts and frequent communications and meetings with the banking agencies and Congress, regulators today released an interim final rule that exempts from the definition of a “covered fund” under the Volcker Rule certain existing collateralized debt obligations (CDOs) backed by trust-preferred securities (TruPS). Thus, banks holding these securities no longer have to divest them by July 2015, and the accounting assessment for these securities should remain as it had been.

On Dec. 27, regulators issued a statement indicating they were reconsidering treatment of TruPS CDOs under the Volcker rule and would release further guidance by Jan. 15. They specifically instructed banks to take the Jan. 15 action into account when completing Dec. 31 call reports due to be filed on Jan. 30. Thus, banks should not have to change the accounting treatment for these securities or take write-downs due to the Volcker Rule.

The final Volcker Rule provision released on Dec. 10 would have required banks, in certain cases, to divest their TruPS CDOs by July 2015 and recognize an impairment under accounting standards before year-end 2013.

Details of the Interim Final Rule
The interim final rule released today permits banks to retain TruPS CDOs they owned as of Dec. 10, 2013, if the CDOs were issued before May 19, 2010, and the bank reasonably believes they are backed primarily by TruPS or subordinated debt of bank holding companies that had less than $15 billion in assets when the securities were issued or of mutual holding companies.

Regulators have provided a non-exclusive list of the TruPS CDOs that meet this test. The test is keyed to the Collins Amendment of the Dodd-Frank Act, which grandfathered Tier 1 capital treatment for TruPS issued before May 19, 2010, by bank holding companies with less than $15 billion in assets or by mutual holding companies. The agencies intend CDOs qualifying for retention under the rule released today to have invested a majority of their proceeds in TruPS or subordinated debt issued by such holding companies. 

Banks of all sizes are permitted to retain the qualifying CDOs, but the TruPS CDOs are exempt from the Volcker Rule only if the bank owned the CDO before Dec. 10. Thus, any TruPS CDOs purchased by banks after that date would have to be divested by July 2015.

The interim final rule will avoid the dramatic market impact of potential write-downs of these securities that could have been required under the Volcker Rule. This is an important response to ICBA’s repeated calls for the regulators to exempt community bank TruPS CDOs from the Volcker Rule.

“ICBA has been relentlessly working and meeting with regulators and Congress on this issue since the federal banking agencies issued the Volcker Rule, and today regulators have responded,” ICBA President and CEO Camden R. Fine said. “The TruPS CDO provision of the final Volcker Rule issued in December would have significantly affected community banks across the nation and the communities they serve.”

In addition to meeting with regulators, ICBA has worked with members of Congress to introduce House and Senate legislation to exempt these instruments from the Volcker Rule. S. 1907, introduced by Sens. Mark Kirk (R-Ill.) and Mike Crapo (R-Idaho), and H.R. 3819, introduced by Reps. Shelley Moore Capito (R-W.Va.) and Jeb Hensarling (R-Texas), would prohibit the Volcker Rule from requiring banks to divest their holdings of CDO TruPS issued before Dec. 10, 2013.

ICBA is reviewing the interim final rule released today to assess its impact and will weigh options for pursuing additional relief measures as necessary.  

ICBA Audio Conference on Interim Final Rule
ICBA is hosting an audio conference at 2 p.m. (Eastern time) this Thursday to cover the interim final rule and how the final Volcker Rule will affect CDO TruPS.

The audio conference is free to ICBA members and nonmembers. Additional resources are available on ICBA’s new webpage dedicated to the Volcker Rule CDO TruPS issue.

Read the Interim Final Rule.

Read the Agency News Release.

Read the Non-Exclusive List of TruPS CDOs that Are Not Covered Funds.

Register for the ICBA Audio Conference.

Visit ICBA’s Volcker Rule Resource Page.

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