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Senate, House Bills Offer Banks Clarity On Treatment of Securities Under Volcker

Tuesday, January 14, 2014
By Jeff Bater

Jan. 10 --Senate Republicans, following lawmakers in the House, have introduced legislation meant to protect community banks from “unintended consequences” brought about by the Volcker rule.

Sens. Mark Kirk (R-Ill.), Mike Crapo (R-Idaho), Pat Toomey (R-Pa.), John Barrasso (R-Wyo.), Mike Enzi (R-Wyo.), Jerry Moran (R-Kan.) and Roger Wicker (R-Miss.) introduced S. 1907, which would amend a provision of bank holding company law regarding prohibitions on investments in certain funds to clarify that such provision shall not be construed to require the divestiture of certain collateralized debt obligations (CDOs) backed by trust-preferred securities or debt securities of collateralized loan obligations (CLOs).

Community and regional banks invested in debt tranches including CDOs backed by TruPS and CLOs in order to get access to capital. “These instruments, once encouraged by federal financial regulators, are now being scorned and penalized for holding these instruments,” a Kirk news release said.

The Volcker rule, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, was finalized by regulators in December. It limits proprietary trading and fund ownership by banks. The American Bankers Association and several member banks have mounted a court challenge to specific provisions that classify TruPS-backed CDOs as funds covered under the Volcker rule.

'Unintended Consequences.'
“One of the first unintended consequences of the Volcker Rule is to force community banks to divest hundreds of millions of dollars at fire sale prices and cause market disruptions in communities they serve,” Crapo, who is the ranking member on the Senate Banking Committee, said in the Kirk news release. “Our targeted fix provides a simple solution to an accounting problem the banking regulators were unable to resolve in December.”

The ABA put its support behind the Kirk bill. “Despite assurances to the contrary, community banks have found out that the Volcker Rule does indeed affect them -- even though they pose no systemic risk,” ABA President Frank Keating said in a statement . “ Without a legislative or regulatory fix, affected institutions face millions of dollars in losses that will undermine their ability to serve their customers and communities.”

The legislation follows a bill introduced in the House by Reps. Shelley Moore Capito (R-W.Va.) and Jeb Hensarling (R-Texas). H.R. 3819 would ensure all banks could retain CDOs backed by TruPS as long as the CDO was created prior to Dec. 10, which is when the regulators approved Volcker.

Jaret Seiberg, an analyst at Guggenheim Securities, said Crapo's support of the Senate bill is significant. The bill, Seiberg said in market commentary, “differs from earlier bills as it clarifies that banks can keep their investments in the debt slice of CDOs backed by trust preferred securities as well as CLOs as long as they were issued prior to Dec. 10, 2013.”

To contact the reporter on this story: Jeff Bater in Washington at

To contact the editor responsible for this story: Joe Tinkelman at

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