Lawmakers Urge Volcker Rule Clarification for Small Banks

WASHINGTON — A bipartisan group of lawmakers is urging regulators to reconsider a provision in the recently finalized Volcker rule that they warn could negatively impact community banks that own trust-preferred securities.

Concerns for small banks arose after the banking agencies finalized the ban on proprietary trading last week. Lawmakers, along with several banking associations, are asking for clarification to the rule's treatment of some securities, including trust-preferred securities, arguing that the rule could significantly deplete bank capital. Since the Volcker Rule's release, at least three banks have announced plans to comply by selling various securities: BankUnited (BKU) in Miami Lakes, Fla.; Cape Bancorp (CBNJ) in Cape May Courthouse, N.J.; and Zions Bancorp (ZION) in Salt Lake City, Utah.

"If the regulators stand by the misdirected application of the Volcker Rule to community bank Trups, the impacts could be devastating to shareholders and the capital of a large number of community banks across the country," said Sens. Mark Kirk, R-Ill., Joe Manchin, D-W.Va., and Roger Wicker, R-Miss., in a letter to regulators on Thursday. "These banks would be required to recognize a write-off in the current quarter for any unrealized losses from holding the security and would be required to liquidate the security by July 2015."

The quick sale date for the securities could lead to a "'fire sale' environment," said Rep. Spencer Bachus, R-Ala., former chairman of the House Financial Services Committee, in a letter Wednesday.

"In essence, this definition of a covered fund along with associated accounting standards could have the effect of artificially creating a distressed asset, and we know from the bitter experience of the financial crisis of the fall of 2008 just how destabilizing distressed assets are to our financial system," the congressman wrote.

Sen. Mike Crapo of Idaho, the top Republican on the Senate Banking Committee, raised similar concerns in a letter to regulators on Wednesday, adding that he is also uncertain how regulators will be able to effectively coordinate rule oversight.

"For example, the Securities and Exchange Commission has jurisdiction over market making activities, but, as a practical matter, prudential banking … examiners may provide frontline oversight of trading desk activity on a daily basis," he wrote. "I am concerned the agencies have not properly considered how this dual oversight will function in practice without causing additional confusion and uncertainty in the markets."