WASHINGTON — A group of lawmakers is stepping up pressure on regulators to adopt a narrow exemption for small banks under the Volcker Rule to address concerns over the treatment of collateralized debt obligations backed by trust-preferred securities.

The move comes after reports GOP Reps. Jeb Hensarling of Texas, chairman of the House Financial Services Committee, and Shelley Moore Capito of West Virginia, introduced legislation that would provide a broad exemption to all banks holding CDOs backed by Trups issued before Dec. 10, when the Volcker Rule was finalized.

But nearly two dozen Democratic lawmakers, led by Rep. Maxine Waters, D-Calif., the ranking member on the banking panel, are warning that a more limited change is warranted for banks with less than $15 billion in assets, citing a provision in the Dodd-Frank Act that addressed treatment of Trups for small banks.

"For many small banks, ability to pool via a CDO structure was a prerequisite for issuance of Trups, and we appreciate that regulators have taken that into account as they review whether they can provide guidance to restructure Trups CDOs such that banks may be able to continue to hold them," Waters and the other Democrats wrote in a letter Tuesday. "Consistent with Section 171 of the Dodd-Frank Act, we believe regulators have the authority to exempt banks with less than $15 billion in assets from the requirement to divest of Trups CDOs, providing important relief to the community banking sector."

At issue is whether banks are required by the Volcker rule to shed CDOs made up of Trups and how quickly. The provision, which is estimated to impact hundreds of institutions, has sparked several banks to announce plans to write down or sell the assets immediately, in some cases at a substantial loss, despite the fact that the Volcker Rule does not go into effect until July 2015.

Regulators are said to be broadly considering two avenues — a broad exemption for all effected institutions or a more limited one abiding by the $15 billion size cap. The banking agencies have said they will respond with a solution by Jan. 15, and could announce an interim final rule as early as the end of this week. The American Bankers Association, meanwhile, has a pending court case against the regulators challenging whether the Volcker Rule should apply to Trups-backed CDOs.

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