Jan 8 - The Independent Community Bankers of America has said it supports new legislation that would protect community banks and the communities they serve from the unintended consequences of new rules designed for Wall Street financial firms. Legislation introduced today would prohibit the Volcker Rule from requiring banks to divest their holdings of certain pools of securities issued before Dec. 10, 2013.
The bill would prevent community banks from having to write down the value of collateralized debt obligations backed by trust-preferred securities. The Volcker rule requires, in certain instances, that banks divest their holdings of CDO TruPS and write down these investments under “other than temporary impairment” accounting rules. For some banks, writing down these securities could result in a permanent loss of capital. The legislation, which was introduced by House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and Subcommittee on Financial Institutions and Consumer Credit Chairman Shelley Moore Capito (R-W.Va.), would minimize the impact of the rule on community banks that hold these securities.
“While the intent of the Volcker Rule was to minimize risky behavior at the largest financial institutions, the final rule issued by regulators would have serious implications for many community banks,” ICBA President and CEO Camden R. Fine said. “ICBA strongly supports legislation introduced today by Chairmen Hensarling and Capito to prevent the rule from negatively affecting economic stability in our communities.”
Banking regulators recently 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 or owning, sponsoring or having certain relationships with hedge funds or private equity funds.
Unfortunately, the final Volcker Rule indicates that these pools of securities securities could be prohibited by the rule, which would require even community banks to divest their holdings by July 2015 and to immediately recognize the impairment under accounting standards. If community banks are forced to write down these investments rather than holding them to maturity, these institutions may have to do so at “fire sale” prices that could result in a permanent loss of capital.
ICBA has repeatedly called for the banking agencies to address the issue and will continue to work with Congress and the regulators to implement a permanent solution.