Community Bankers of Iowa Monthly Banker Update January 2014 | Page 19

U.S. Regulators Working On Guidance
to Clarify Volcker Rule’s CDO Provision
Written By: Ryan Tracy

Guidance May Only Be Temporary Reprieve For Banks Holding CDOs, CLOs
WASHINGTON—One week after releasing the more than
900-page Volcker rule, U.S. banking regulators are considering
issuing guidance to address concerns about the rule’s impact
on some small and midsize banks, according to people familiar
with the matter.
The new guidance, which could come from banking regulators,
comes amid worries that banks will take a hit to their capital
levels as a result of a provision some have interpreted as
prohibiting firms from investing in certain financial products
known as collateralized debt or collateralized loan obligations.
The regulatory guidance might give banks a temporary
reprieve but it is unclear whether regulators will lift the ban on
those types of investments, the people familiar with the matter
said. Banks may have to do their own analysis to determine if
they are eligible for exceptions from the ban, one of the people
said.
Some banks have stakes in so-called CDOs or CLOs, which
are bundles of mortgages, corporate loans, or other debt. A
fact sheet for community banks, issued with the larger Volcker
rule last week, says banks that bought into the bundles of
loans, rather than organizing the investments themselves, will
have to divest them as part of the rule’s ban on certain types of
bank risk-taking.
That could mean a write-down for some institutions just before
a year-end accounting deadline. Zions Bancorp. of Salt Lake

City said Monday that it would have to sell some CDOs and
take a $387 million charge.
Camden Fine, president of the trade group Independent
Community Bankers of America, said about 300 banks are
affected by the provision and could be forced to unload the
assets at a loss, potentially depleting their capital.
In a letter Monday, he asked a trio of U.S. banking overseers—
the Office of the Comptroller of the Currency, the Federal
Deposit Insurance Corp. and the Federal Reserve—to make
it clear that banks won’t have to write down the assets
permanently. “What [the regulators] are telling me is that
they’re working on a solution. Their goal is to attempt to get the
banks through the end of the year without having to take writedowns,” Mr. Fine said in an interview.
That leaves open the question of whether banks will be able
to continue to hold the assets going forward, even if they
avoid a year-end hit to their accounts. For a bank, “you can’t
just ignore this because they tell you to forget about it for
two weeks,” said Jaret Seiberg, an analyst at Guggenheim
Securities.
Alternatively, regulators could decide that some investments in
CDOs and CLOs constitute debt holdings, rather than equity,
and so don’t come under the Volcker rule, Mr. Seiberg said.

Welcome New Members
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CBI Banker Update | JANUARY 2014

19