Even before being implemented, a particular provision of the
Volcker Rule is being challenged in the court. The American
Bankers Association (ABA) has filed a lawsuit in the U.S. Court
of Appeals for the District of Columbia Circuit over a provision
that requires banks to sell their holdings in certain
collateralized debt obligations (CDOs).
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The ABA, which represents U.S. banks of all sizes and charters,
stated that divesting these CDOs backed by trust-preferred
securities will entail losses of approximately $600 million for
the small community banks. Hence, the ABA seeks to block the
provision before it impacts the banks' capital position at the
end of 2013.
While filing the lawsuit, the ABA stated that the regulators did
not properly analyze the economic cost of this provision on small
community banks and the impact of this decision on the banks'
capital levels. Further, the lawsuit alleges that the final
version of the Volcker Rule approved by the regulators on Dec 10
was vastly different from the initial version on which public
comments were invited.
The Volcker Rule was devised to prevent banks from owning more
than 3% of any individual hedge fund or private equity fund.
Further, it restricts banks from investing more than 3% of their
total equity capital in private funds.
Though the banks have time till Jul 21, 2015 to divest CDOs, the
way these will be recorded in the balance sheet needs to be
changed by the end of fourth-quarter 2013. The banks will have to
convert CDOs from "Held to Maturity" to "Available for Sale",
thereby leading to a one-time charge as well as an adverse impact
on the capital ratios.
Consequently, many banks have announced their plans to abide by
) plans to sell certain securities, while
) and MBT Financial Corp. anticipate one-time write-down in the
Prohibition of propriety trading through the implementation of
the Volcker Rule will likely lead to further slowdown of top-line
growth in many banks. With the ABA challenging the provision of
Volcker Rule, major Wall Street banks including
JPMorgan Chase & Co.
Bank of America Corporation
The Goldman Sachs Group, Inc.
) might follow suit.
Though Volcker Rule will hurt earnings as well as shareholders'
returns in the short term, from a broad perspective, it will
enhance investors' security and drive the economy toward