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From Banking and Finance Law Daily, January 8, 2014

House bill would ease Volcker Rule for community banks

By Mark S. Nelson, J.D.

House members today renewed their call for legislative and regulatory action to ease a Volcker Rule provision they say may unfairly impact community banks. House Financial Services Committee Chair Jeb Hensarling (R-Tex.) introduced a bill co-sponsored by Financial Institutions and Consumer Credit Subcommittee Chair Shelley Moore Capito (R-W. Va.) that would amend the Bank Holding Company Act (BHCA) to avoid banks’ divestitures of some collateralized debt obligations (CDOs). Separately, 22 House Democrats signed a letter urging federal financial regulators to use their Dodd-Frank Act authority to get a similar result.

House correction bill. The Fairness for Community Job Creators Act, H.R. 3819, would revise the BHCA to add a rule of construction for CDOs. Specifically, the bill says BHCA Sec. 13 may not be read to mandate divestiture of CDOs issued before December 10, 2013, if the CDOs are predominantly backed by trust-preferred securities (TruPS) on that date. Federal financial regulators issued the final Volcker Rule on December 10, 2013.

According to a press release announcing the bill, community banks typically do not engage in activities that fall within the Volcker Rule’s ambit. But some community banks have invested in CDOs backed by TruPS in order to gain access to more capital. The bill’s sponsors say the final Volcker Rule may require these community banks to mark CDOs backed by TruPS as available for sale (instead of holding them to maturity), which may dent community banks’ balance sheets and force them to curb loans to businesses. Community banks also worry that Volcker Rule compliance may subject them to regulatory enforcement actions.

“For more than three years, those who support the Dodd-Frank Act assured community banks they would not be harmed by the Volcker regulations,” said Chair Hensarling. “Then, in the dark of night, suddenly Washington regulators at the last minute changed the rules and included these products in the Volcker regulations with no time for public comment or review,” he added.

Chair Capito said the bill would aid community banks’ and other businesses’ recovery from the 2008 economic crisis. “This targeted legislation prevents community banks from being forced to take considerable losses on investments they intend to hold to maturity,” said Chair Capito.

Democrats seek agency relief. House Democrats sent a letter to key federal regulators yesterday asking them to use their Dodd-Frank Act authority to ease the CDO-backed TruPS burden on community banks. The letter, signed by Ranking Member Maxine Waters (D-Cal.) and 21 of her financial services committee colleagues, urged regulators to invoke Dodd-Frank Act Sec. 171, which, subject to date limits, does not impose capital deductions for debt or equity instruments (e.g., TruPS) held by a bank with total consolidated assets of less than $15 billion. TruPS must otherwise be phased-out of banks’ capital. Section 171’s overall goal, however, is to impose generally applicable leverage and risk-based capital requirements.

According to the letter, CDO-backed TruPS held by “hundreds” of smaller banks may fall within the final Volcker Rule’s definition of “covered funds.” Inclusion of these instruments in “covered funds” could impact community banks because the “pool” feature of CDO-backed TruPS allowed them to make these investments.

The letter acknowledged regulators’ recent decisions to take second looks at key provisions of the final Volcker Rule. The letter also noted members’ belief that regulators can opt to exempt banks with less than $15 billion in total consolidated assets from the Volcker Rule’s mandate to divest CDO-backed TruPS.

Agency review. Late last year, the SEC and federal banking regulators issued a statement stating they would review whether the final Volcker Rule conflicts with Dodd-Frank Act Sec. 171. The statement noted the concerns voiced by community banks. The federal regulators said they plan to act by January 15, 2014.

MainStory: TopStory BankingOperations DoddFrankAct FinancialStability SecuritiesDerivatives VolckerRule

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