WASHINGTON The American Bankers Association plans to challenge the Volcker Rule in court unless regulators immediately suspend portions of the controversial regulation that restrict certain collateralized debt obligations of trust-preferred securities.
In a letter to regulators, the trade group said the financial harm from the provision is "real, imminent and irreparable."
"If the rule is not suspended, we will shortly file a lawsuit challenging the rule and seeking emergency relief," said Frank Keating, the president and chief executive of the ABA. "In light of the short time frame banking entities have to evaluate the status of their investments, make decisions regarding valuations and reach agreement with their accountants, we request, in the interest of fairness, that you issue a stay of these provisions, and that you keep this stay in effect until these issues are resolved, either through further dialogue or, if necessary, by the courts."
At issue are whether banks are required to shed CDOs that are made up of trust-preferred holdings and how quickly. Under the final Volcker Rule issued two weeks ago, regulators said that certain CDOs that relied on a particular legal exemption from investment registration might be restricted.
As a result, at least three banks said they would have to write down or sell such assets immediately, potentially at a substantial loss, despite the fact that the Volcker Rule does not go into effect until July 2015. Zions Bancorp. in Salt Lake City said it may take a $387 million charge on its portfolio of CDOs.
The problem is primarily accounting-related. If these Trup CDOs are covered by the Volcker Rule, banks could no longer treat them as available-to-maturity securities, starting by the end of the fourth quarter. Instead, they would have to mark them as available-for-sale, taking significant write-downs in the process.
"Under accounting rules, you have to take a hit as soon as you recognize you are going to take a hit," said Wayne Abernathy, executive vice president for financial institutions policy and regulatory affairs for the ABA, in an interview.
Regulators released guidance late Thursday that appeared designed to prevent that outcome, saying banks should take time to determine whether those CDOs could be restructured so that they are not covered by the Volcker Rule. The message was implicit, but suggested that banks did not need to take write-downs immediately while they made a determination about the status of the CDOs.
The guidance did not satisfy banks and industry groups, however.
"The Volcker Rule's purpose was to control systemic risk," Abernathy said. "To come up with any kind of conclusion that it is forcing investments out of community banks can't be the right answer."
Abernathy said the ABA hopes to file the lawsuit within the next day. He said courts might be inclined to grant a stay on this portion of the Volcker Rule because its impact would be dire.
"There is clear harm if the court doesn't take action. If they do take action, there's no harm," he said.
Abernathy hopes, however, that regulators will suspend this part of the rule so that they can look at the issue further. That would prevent institutions from recognizing losses while regulators consider possible changes.
The fear is that banks will take write-downs by the end of the year, rapidly depleting capital.
"Banking entities investing in pooled Trups that do not pose the kind of systemic risk the Volcker rule is intended to capture are facing unexpected and precipitous write-downs on these investments that are not justified by any safety and soundness concern," Keating wrote. "The effect of the Volcker rule on banking entities holding these investments is itself causing safety and soundness concerns."