WASHINGTON, D.C. — The Independent Community Bankers of America (ICBA) is calling on federal regulators to broaden Volcker Rule accommodations for community bank holdings of collateralized debt obligations backed by trust-preferred securities.
In a comment letter, ICBA wrote that the agencies’ interim final rule should exempt all TruPS CDOs and collateralized loan obligations to avoid unnecessary community bank write-downs and to conform with Congress’ intent to target only the largest banks.
“The Volcker Rule was intended to prevent large financial institutions from undertaking risky investments,” ICBA wrote. “It was never the intent of Congress to cover TruPS CDOs or CLOs as ‘covered funds’ under the Volcker Rule, nor was it the intent of Congress for the Volcker Rule to adversely impact community banks.”
Despite the agencies’ interim final rule designed to mitigate the negative consequences of the Volcker Rule on community banks, the rule will still have an adverse impact on many of these institutions, the ICBA claims. A recent ICBA survey found that 6 percent of affected community banks would still have to divest all of their TruPS CDOs and another 16 percent could only partially retain their holdings without a broader exemption.
Prior to the release of the interim final rule, the Volcker Rule would have required, in certain instances, that banks divest their holdings of TruPS CDOs and write down these investments under “other than temporary impairment” accounting standards. For some banks, writing down these securities would have resulted in a permanent loss of capital. The interim final rule permits banks to retain TruPS CDOs they owned as of Dec. 10, 2013, if the CDOs were issued before May 19, 2010, and 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.
In its comment letter, ICBA wrote that the Collins Amendment of the Dodd-Frank Act authorizes the agencies to grandfather CDOs backed by “qualified” TruPS held by community banks. But ICBA also urged the agencies to broaden the exemption to include all TruPS CDOs and CLOs. The association also urged the agencies to be flexible under both the Collins Amendment and the Volcker Rule with institutions that had more than $15 billion in consolidated assets as of the cut-off date but have since shrunk their asset size to below $15 billion.