Dec 20 - The Independent Community Bankers of America said it remains deeply concerned with Volcker Rule provisions requiring banks to permanently write down their holdings of collateralized debt obligations backed by trust-preferred securities, which are certain pools of securities issued by banks to raise capital. This could cause many community banks to write down these securities by year-end. Despite the release by federal banking regulators of an FAQ document regarding regulatory treatment of the securities, there are many underlying questions that remain unanswered for community banks that could potentially be affected by the rule.
“Unfortunately, the document released today isn’t a permanent solution to a very real problem that would have serious implications for community banks,” ICBA President and CEO Camden R. Fine said. “We’ve been in calls and meetings with community bankers from across the country who have said that their capital and earnings will be significantly impacted by this provision. ICBA will continue to work vigorously for a permanent solution on behalf of the nation’s community banks, which didn’t cause the financial crisis in the first place.”
Banking regulators last week issued final regulations implementing the Volcker Rule, which bars depository institutions and their affiliates from engaging in short-term proprietary trading for their own account. It also prohibits these institutions from owning, sponsoring or having certain relationships with hedge funds or private equity funds.
Unfortunately, the final Volcker Rule indicates that the affected securities could be considered an ownership interest in a “covered fund” prohibited by the rule. This would require banks, including community banks, to divest their holdings by July 2015 and to immediately recognize the impairment, before year-end 2013, under “other than temporary impairment” accounting standards. If community banks are forced to write these investments down, they may have to do so at “fire sale” prices that could result in a permanent loss of capital, rather than holding these investments to maturity.
ICBA will continue working with the regulators and Congress to address this important issue. More information on the community bank impact of the Volcker Rule is available at www.icba.org.