It took over three years for regulators to finalize the so-called Volcker rule intended to restrict banks from engaging in certain forms of proprietary trading which reformers claim contributed to the 2008 financial crisis. But it only took two weeks for the banking community to file suit to stop one of its provisions from going in to effect.
This particular prohibition involves a special kind of collateralized debt obligations (CDO) called trust-preferred securities, which are hybrid instruments – partly stocks and partly bonds. Banks hold trust-preferred securities to increase their capital levels. The American Bankers Association sued the three regulatory authorities tasked with writing the rule on the grounds that small banks would take big losses if this directive is implemented. One Salt Lake City regional lender, Zions Bancorporation, announced, as an example, that the rule requires it to write down a $387 million fourth quarter loss. Another claim made in the suit is that the originally-proposed text, subject to years of notice and comment as part of the administrative rule-writing process, did not include trust-preferred securities as one of the CDOs to be banned by the Volcker Rule.
Now, in response, the regulatory bodies announced they are revising the provision and allowing smaller banks to hold trust-preferred securities. The prohibition will no longer apply to banks with less than $15 billion in total assets. And even the larger banks will not have to sell these securities if they acquired them before December 10, 2013, the date the Volcker rule was officially issued.
Whether this reaction to the legal action will quell attacks from the banking community is still unclear. The banking association has yet to actually dismiss its suit although part of the group it represents may no longer have standing to register its complaint. Also the fact that regulators appeared to retreat, in the face of this opposition, raises the concern whether the Federal Reserve, Office of Comptroller of the Currency and FDIC will similarly relax, if pressed, other portions of the Dodd-Frank Act that was passed to curtail some of the conditions and activities which led to the financial crisis.
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