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Kirk, Crapo, Toomey, Barrasso, Enzi, Moran, and Wicker Introduce Legislation To Relieve Community Banks Of Volcker Rule Impact

Thursday, Jan 9, 2014

WASHINGTON – U.S. Senators 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 legislation today that would relieve community banks from an unintended consequence due to a provision within the Volcker Rule.

In nearly 300 banks across the country, such actions would end up being a permanent loss of financial capital.

"Community banks were promised that this rule would not impact them, and I am disappointed by the requirements that the rule is imposing upon nearly 300 of our nation's community banks," Sen. Kirk said. "Agree or disagree with the intent of the Volcker Rule, with a problem of this magnitude I want to reiterate to the Federal regulators as they contemplate a fix for this provision, it needs to be the best and most responsible fix available."

Senator Crapo, Ranking Member of the Banking Committee, said, “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. Our targeted fix provides a simple solution to an accounting problem the banking regulators were unable to resolve in December.”

The Volcker Rule, which is part of the Dodd-Frank Act of 2010 and is over 800 pages long, required that community banks holding CDOs would need to divest their holdings of certain pools of securities before December 10, 2013. Legislation introduced today seeks to minimize the impact of this rule on community banks so that they will not have to significantly write down the value of their CDOs (Collateral Debt Obligations) backed by TruPS (Trust Preferred Securities) because of this newly imposed regulation.

Background:

The Volcker Rule was intended to end risky proprietary trading. TruPS CDOs are not hedge funds or a proprietary trade. Many small community banks hold CDOs backed by TruPS and these instruments did not cause the financial crisis.

As required by the Dodd-Frank Act, Federal financial regulators released the final Volker Rule—a rule that was over 800 pages long, on December 10, 2013. While community banks had been assured that the Volker Rule would not harm or pertain to them, it was discovered that the final rule contained a provision that unduly and dramatically hurt a number of community banks. In the past community and regional banks invested in debt tranches including collateralized debt obligations (CDOs) backed by trust preferred securities (TruPS) and CLOs to attain access to capital. These instruments, once encouraged by Federal financial regulators are now being scorned and penalized for holding these instruments. Not only were these instruments once encouraged, but also these debt instruments were not the cause of the financial crisis and there was little/no precursor in interim rules released by the agencies that these instruments would be so negatively penalized.

As proposed, the Volcker Rule would require a number of banks to divest their holdings of CDO TruPS write down these investments under “other than temporary impairment” according to GAAP accounting rules—which for many banks could result in a permanent loss of capital.

Big vs. Small Banks

This is one issue where this is not a big bank vs. small bank issue—this is simply a “bank” issue, limiting the size of banks that can qualify for this exemption hurts banks of all sizes. It is inappropriate—and inconsistent with the Collins Amendment (which was intended to preserve the community bank TruPS market)—if an asset size limit is imposed on the banks investing in TruPS CDOs. Imposing such a limit could effectively freeze out an important segment of the investor market (i.e. banks with greater assets than the asset limit) for CDOs holding community bank TruPS.

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