Relief from Volcker sought for community banks

Lawmakers and industry groups are pleading with financial regulators to spare the nation’s community banks from a provision of the newly unveiled Volcker Rule that they say would unfairly punish the small and mid-size institutions.

The Volcker Rule, a cornerstone of the Dodd-Frank Wall Street reform law, is designed to curtail the brand of risky bank trading seen as a contributor to the Great Recession of 2008.

The 950-plus page rule covers a broad swath of activities at financial institutions that get federal backing, including regulations governing collateralized debt obligations (CDOs). 

The Volcker Rule raised questions about whether community banks need to get rid of these bundles of debt, particularly those backed by pools of securities known as TruPS or trust-preferred securities, which are seen by the government as risky.

Federal guidance issued last week to community banks under Volcker directs institutions to divest themselves of the CDOs by July 15, unless the institution organized the investment bundles themselves, rather than merely buying into them.

The provision has prompted an outcry from trade groups, who say community banks played no role in causing the economic crisis but have millions of dollars wrapped up in holdings that are suddenly outlawed.

The American Association of Bank Directors (AABD), for instance, bristled at regulators’ suggestion in the Volcker guidance that, “only a small number of community banks own … collateralized debt obligations.”

“We don’t believe that the issue only affects a small number of community banks,” AABD Executive Director Dave Baris wrote Wednesday in a letter to financial regulators. “Based on the calls we have received so far, it is a far more significant issue.”

The Independent Community Bankers of America echoed the concerns in a similar letter. The group’s president, Camden Fine, called on regulators to issue further guidance clarifying that they do not need to permanently write down their CDO holdings.

“As you know, the intent of the Volcker Rule was to prohibit proprietary trading by the large banks and the ownership of hedge funds and private equity funds,” Fine wrote. “How did this intent ever evolve into including the divestiture of legitimate portfolio holdings of community banks?”

On Thursday, a trio of U.S. senators joined the chorus of those calling for a carve-out in the law or grandfather status for banks under a certain size. Sens. Joe Manchin (D-W.Va.), Mark Kirk (R-Ill.) and Roger Wicker (R-Miss.) argue that the banks would have to write off hundreds of millions of dollars in capital in a matter of just a few months — and long before the securities mature.

“The purpose of the Volcker Rule was to ensure that the trading activities of the big banks do not undermine the U.S. economy and financial stability, not to punish community banks,” the lawmakers wrote to top financial regulators, including Treasury Secretary Jacob Lew, Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairwoman Mary Jo White.

“We urge each of your agencies to take action swiftly to grant relief to those financial institutions that had nothing to do with the 2008 economic crisis, but will have everything to do with our economic recovery,” they wrote.