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Thursday, December 19, 2013

Agencies Decline to Fix Volcker TruPS CDO Treatment

In response to industry and congressional concerns over the Volcker Rule’s treatment of trust preferred securities held in collateralized debt obligations, federal agencies this evening released a frequently asked questions document attempting to provide bankers with further clarity. However, the agencies did not satisfactorily address bankers’ questions.

“ABA is dismayed that the regulators have not found a resolution to address the disruptive consequences of the Volcker Rule on community banks,” said ABA President and CEO Frank Keating. “Community banks were reassured that the Volcker Rule wouldn’t affect them, as they pose no conceivable systemic risk, but they have found out otherwise -- and with only two weeks before the end of the year.”

Accountants and banking law experts have expressed the view that CDOs backed by TruPs are considered “covered funds” subject to the Volcker Rule’s restrictions. If so, banks holding TruPS CDOs may need to sell their ownership interests, often at a significant loss, and many banks will need to book those losses on their financial statements by the end of 2013.

The agencies did not address bankers’ accounting-related concerns and responsibilities, which would force banks to write down the value of their TruPS CDO investments in the current quarter.

“The consequences of this unexpected bureaucratic bombshell are millions of dollars in losses that will undermine affected banks’ ability to serve their customers and communities,” Keating added.

Read the agency FAQ.

Read ABA’s summary of Volcker’s effect on TruPS CDOs.

Indicates ABA members-only material.

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