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Democrats Urge Regulators to Provide Targeted Volcker Relief to Community Banks

Washington, DC, January 8, 2014

As regulators contemplate changes to a provision of the “Volcker Rule” related to the treatment of investments in Collateralized Debt Obligations (CDOs) backed by Trust Preferred Securities (TruPS), 22 Democratic members of the Financial Services Committee have expressed their support for providing important regulatory relief to the community banking sector while preserving strong controls on banks’ investments.

In a letter to the heads of the relevant regulatory agencies, the wide array of Democrats expressed the belief that through the Dodd Frank Wall Street Reform and Consumer Protection Act, Congress “very deliberately” indicated that regulators can exempt banks with less than $15 billion in assets from provisions requiring the divestment of these so-called TruPS CDOs. They also applauded regulators’ efforts to minimize the impact on small banks without undermining the Volcker rule.

Led by Ranking Member Maxine Waters (D-CA), the letter reads, “For many small banks, the ability to pool via a CDO structure was a prerequisite for issuance of TruPS, and we appreciate that regulators have taken that fact into account as they review whether they can help provide guidance to restructure TruPS CDOs such that banks may be able to continue to hold them. We also understand that the agencies have been reviewing whether it would be appropriate to exempt TruPS CDOs from the definition of ‘Covered Funds’ altogether. Consistent with Section 171 of the Dodd-Frank Act, we believe regulators have the authority to exempt banks with less than $15 billion in assets from the requirement to divest of TruPS CDOs, providing important relief to the community banking sector.

TruPS CDOs are held by hundreds of community banks, and would be designated as "Covered Funds" under the final Volcker rule. Recent debate has emerged over the size of the financial institutions that would be exempt. Regulators have stated they would evaluate whether to provide relief by January 15, 2014.

Simultaneously, the letter’s authors expressed their strong belief that the “Volcker rule maintain strong controls on banks' investments in external funds, including securitizations such as CDOs which were at the heart of the 2008 financial crisis.”

Text of the letter is below. The final version is available here.

January 7, 2014

Mary Jo White, Chair SEC
Mark Wetjen, Acting Chair CFTC
Martin Gruenberg, Chair FDIC
Thomas Curry, Director OCC
Ben Bernanke, Chair FRB

Chairmen White, Wetjen, Gruenberg, Bernanke and Director Curry,

We are strongly supportive of your agencies as you work to implement a clear and strong Volcker Rule. As you know, a number of community banks have brought to our attention concerns with regard to the treatment of investments in Collateralized Debt Obligations (CDOs) backed by Trust Preferred Securities (TruPS).

TruPS CDOs, which are held by hundreds of community banks, would be designated as "Covered Funds" under the final rule. It is important to us that the Volcker rule maintain strong controls on banks' investments in external funds, including securitizations such as CDOs which were at the heart of the 2008 financial crisis.

In Section 171 of the Dodd Frank Act, however, Congress very deliberately defined its intended treatment of TruPS issued by banks with less than $15 billion in assets. As you have recognized in your December 27th joint statement, implementation of the Volcker Rule may be inconsistent with Congress's intention for treatment of these specific investments. For many small banks, the ability to pool via a CDO structure was a prerequisite for issuance of TruPS, and we appreciate that regulators have taken that fact into account as they review whether they can help provide guidance to restructure TruPS CDOs such that banks may be able to continue to hold them. We also understand that the agencies have been reviewing whether it would be appropriate to exempt TruPS CDOs from the definition of “Covered Funds” altogether. Consistent with Section 171 of the Dodd-Frank Act, we believe regulators have the authority to exempt banks with less than $15 billion in assets from the requirement to divest of TruPS CDOs, providing important relief to the community banking sector.

Your agencies have stated that minimizing the regulatory impact on small banks was a guiding principle for drafting and implementation of the rule. You have made clear by your actions in reviewing this issue so quickly that the agencies are committed to responding to the concerns of our community banks. We applaud your efforts to address these important concerns without undermining the safety and soundness of our banking system by weakening the rule.

Maxine Waters (CA), Ranking Member
Carolyn Maloney (NY)
Brad Sherman (CA)
Gregory W. Meeks (NY)
Rubén Hinojosa (TX)
Wm. Lacy Clay (MO)
Stephen F. Lynch (MA)
David Scott (GA)
Al Green (TX)
Gwen Moore (WI)
Keith Ellison (MN)
Ed Perlmutter (CO)
James A. Himes (CT)
Gary C. Peters (MI)
John C. Carney, Jr. (DE)
Terri A. Sewell (AL)
Bill Foster (IL)
Daniel T. Kildee (MI)
Patrick Murphy (FL)
John K. Delaney (MD)
Joyce Beatty (OH)
Denny Heck (WA)

 

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