WASHINGTON Lawmakers are gearing up to intervene if regulators fail to resolve ongoing concerns about the treatment of collateralized debt obligations backed by trust-preferred securities under the Volcker Rule.
Reps. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, and Shelley Moore Capito, R-W.Va., are working on a bill that would provide a broad exemption to existing Trups-backed obligations, which they plan to introduce on Tuesday, according to a spokesman for the chairman.
Efforts on Capitol Hill to address the problem may serve multiple purposes, including possibly forcing the regulators to act faster and in a more sweeping manner to resolve the issue. The legislation also provides another recourse for banks if they are unsatisfied with how the agencies handle the situation.
"The legislative viewpoints will at least be considered as regulators finalize their review of the provision, so theres something to be said for legislative intent being clearly stated prior to the completion of the regulatory review," said Isaac Boltansky, an analyst at Compass Point Research & Trading.
Regulators are trying to issue an interim final rule by the end of the week that would prevent hundreds of banks from either selling or significantly writing down the value of the CDOs due to the Volcker Rule.
"We want to demonstrate to regulators that this is a top priority, a serious concern for Congress to make sure that this thing is fixed," said Paul Merski, executive vice president for congressional relations and chief economist at the Independent Community Bankers of America. "It's also a backstop if the regulatory fix is not good enough. If the regulators don't fix this properly, there's support to quickly enact legislation."
Lawmakers on both sides of the political aisle have raised concerns with the issue since the Volcker Rule was finalized on Dec. 10, and the banking industry has thus far presented a largely united front in pushing for a broad exemption for all institutions. Still, regulators have considered that, along with another, much narrower change exempting Trups-backed CDOs for institutions with less than $15 billion of assets.
Rep. Maxine Waters, D-Calif., the lead Democrat on the banking panel, is said to prefer the exemption for smaller institutions, according to one industry source.
"I support, and have pushed for, Trust Preferred Securities relief limited to community banks as agreed to under the Dodd-Frank Wall Street Reform Act," Waters said in a statement to American Banker.
Merski added that he's hopeful the Senate will also introduce legislation. Sens. Mark Kirk, R-Ill., and Joe Manchin, D-W.Va., are working on a fix, according to a spokeswoman for Manchin, who did not provide further detail. Kirk and Manchin, along with other lawmakers, including Sen. Mike Crapo, R-Idaho, the lead Republican on the Senate Banking Committee, expressed their concern with the provision to regulators in several letters before the holiday recess.
At issue is whether banks are required to shed CDOs made up of Trups and how quickly. Under the final Volcker Rule issued in early December, regulators said that certain Trups-backed CDOs would be covered.
That has sparked several banks to announce plans to write down or sell such assets immediately, some at a substantial loss, despite the fact that the Volcker Rule does not go into effect until July 2015.
The problem is one of accounting. If these CDOs are covered by the Volcker Rule, banks can no longer treat them as available-to-maturity securities and must instead mark them as available-for-sale, either selling them or taking significant writedowns in the process. Importantly, banks would have to change the accounting treatment for their fourth-quarter filings, which are due at the end of January.
But its unclear how much help any bill or new rule provides now.
"Regulators did suggest banks could wait until they filed their financial reports to decide on the treatment. And maybe some banks did hold off. But I suspect your average community bank sold these instruments rather than deal with the legal and accounting headaches associated with waiting for regulators to act," said Jaret Seiberg, an analyst with Guggenheim Securities. "Patching up the ship after it has sunk does little good. And that is what we are seeing from Capitol Hill and the regulators."
Broadly speaking, regulators have entertained at least two ways to fix the problem. One is to exempt existing Trups-backed CDOs for all institutions with less than $15 billion of assets. Such a cutoff would be consistent with the Collins Amendment, a provision of the Dodd-Frank Act that said Trups no longer count as Tier 1 capital but which grandfathered existing securities for smaller banks. But there are legal questions about whether the regulators are allowed such an asset cutoff under the Volcker Rule.
The other approach would be to exempt all existing Trups-backed CDOs, regardless of the size of the bank that owns them. That solution is more likely to quell any remaining criticism surrounding the issue as there is little to no issuance currently of new Trups-backed CDOs. It also appears closer to the bill that Hensarling and Capito are poised to introduce.
The issue is fast moving and likely to continue to evolve quickly. Regulators have said they will issue an interim final rule by Jan. 15, but privately are trying to move faster. The American Bankers Association, meanwhile, has a pending court case against the regulators challenging whether the Volcker Rule should apply to Trups-backed CDOs.