Volcker Rule Community Banks.JPG
Paul Volcker, the former chairman of the Federal Reserve Board and the namesake for a new set of rules aimed at clamping down on excessive risk-taking by big banks.
(Pete Marovich/Bloomberg)
Federal regulators have agreed to give community banks, including ones in New Jersey, some relief from an unexpected hitch caused by the Volcker Rule.
Under rules finalized late Tuesday, banks with less than $15 billion in assets no longer have to rid themselves of exotic investments known as collateralized debt obligations backed by trust-preferred securities, or TruPS.
Regulators told banks last month that holding such instruments would violate the Volcker Rule, a recently finalized provision of the 2010 Dodd-Frank financial reform law that aims at clamping down on excessive risk-taking by major banks.
The bar came as surprise to banks and industry groups. While regulators gave lenders until July of 2015 to divest their TruPS holdings, lobbyists warned that small banks still faced immediate damage from the change. That's because accounting principles would require banks to revise their books to reflect the market value of their TruPS holdings, which in many cases haven't yet recovered from losses incurred during the financial crisis.
The American Bankers Association, in a lawsuit last month, alleged that the Volcker Rule's treatment of TruPS would cause 275 community banks across the U.S. to realize a collective $600 million hit against their profits or capital.
Several New Jersey-based banks were among those facing potential losses, The Star-Ledger reported last month. One Garden State lender, Cape Bancorp, sold its TruPS holdings for a roughly $800,000 loss rather than take a potential $2.5 million hit from the instruments.
Under the fix issued Tuesday by five banking and Wall Street regulators, banks with less than $15 billion in assets will be allowed to hold onto certain TruPS investments, provided they meet a few conditions.
The American Bankers Association applauded the move but said it intends to do further analysis before deciding on how to proceed with its lawsuit.
“After reviewing the regulators’ interim final rule and assessing the relief it provides affected banks, we have decided to withdraw our request for emergency relief in the pending litigation," Frank Keating, ABA president and chief executive officer, in a statement.
"We are, however, deferring a decision on dismissal of the litigation to allow time to consult with our membership and finalize our analysis of the impact and implications of the interim final rule,” he said.
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