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CPBJ Extra Blog

Volcker Rule changes in plain English

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If you're not in the banking industry, it's somewhat difficult to get a full grasp on the controversial Volcker Rule, the federal government's three-year magnum opus to prevent the kind of risky behavior that helped land the country in deep recession.

I've read volumes on it, and I'm still not sure I'm getting it all. But here's all you really need to know, thanks to one handy-dandy sentence I read in a Reuters article this week:

"(It) generally bans banks from making speculative bets with their own money."

Bing, bang, boom, easy peasy. Before 2008, federal regulations overseeing the financial industry were becoming more lax and the industry took advantage by making riskier loans. The chickens came home to roost, the market collapsed, the country's economy went into the toilet. Here we are more than five years later, shovels in hand, still trying to dig our way out.

Hence, the Volcker Rule, a vital piece of the Dodd–Frank Wall Street Reform and Consumer Protection Act, a 71-page document containing some of the most difficult language I've ever read. So when federal regulators announced Tuesday they were changing the rule they passed in December, it's best to keep that sentence in mind:

"(It) generally bans banks from making speculative bets with their own money."

Now, here comes the nitty gritty of Tuesday's change:

The "interim final rule" approved Tuesday allows banks to keep collateralized debt obligations (CDOs) backed by trust-preferred securities (TruPS), under the following conditions:

  • They were owned before Dec. 10, 2013.
  • The CDOs were issued before May 19, 2010.
  • They were issued by a bank with less than $15 billion is assets, which eliminates only one midstate-based bank — Susquehanna Bank, which has more than $18 billion in assets.

Although, wait a minute. According to a Susquehanna Bank news release from December 2010 — far past the May cut-off date of May 19, 2010 — Susquehanna Bank had $14 billion in assets at that time. So is it still subject to the Volcker Rule, or is it exempt? That's probably for the lawyers to decide in about five years, when they finally finish reading and understanding all the paperwork.

And in case you're getting really crazy, you can read the list of excluded TruPS CDOs approved by the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

OK, time to bring the nonbankers back down to earth for a second:

"(It) generally bans banks from making speculative bets with their own money."

Here's the skinny: This is good for community banks. The concession from federal regulators is a nod to them, after their representatives spent the last few months railing against a paint-with-one-big-brush policy to govern the entire financial industry. And that's what they believed the Volcker Rule was when it passed in December.

Community banks leaned heavily on those TruPS CDOs after the recession, when credit was hard to find in other places, and cutting them out would have cost banks about $600 million, according to the American Bankers Association.

But if you don't understand it, don't worry, you're not alone. I've read thousands of news releases; I probably get 30 or 40 a day. They are almost always well thought out, have been studied and approved by every executive in the company, and make every effort to seem completely knowledgeable.

With that in mind, here are a couple tidbits from some of the Volcker Rule's most ardent critics after the interim final rule was announced Tuesday:

From the American Bankers Association, which filed a lawsuit against the Volcker Rule in December: "After reviewing the regulators' interim final rule and assessing the relief it provides affected banks, we have decided to withdraw our request for emergency relief in the pending litigation. We are, however, deferring a decision on dismissal of the litigation to allow time to consult with our membership and finalize our analysis of the impact and implications of the interim final rule."

The final line of one from the Independent Community Bankers Association: "ICBA will assess the impact of the interim final rule released today and will weigh options for pursuing additional relief measures as necessary."

In essence: "We're pretty sure we won this one, but ... we still have to make sure."

All together now -- "(It) generally bans banks from making speculative bets with their own money."

Happy reading.

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