Staff Writer
Columbus CEO

c.2013 New York Times News Service

Federal regulators Friday again tried to quiet the controversy about the potential impact of a provision of the Volcker Rule on hundreds of community banks.

The regulators, facing a lawsuit from a banking trade group, said they were reviewing whether the new regulation required community banks to rid themselves of an obscure and complex security and, in the process, take an immediate hit to their capital levels.

The statement is the latest attempt by regulators to address concerns from community bankers about the Volcker Rule’s effect on collateralized debt obligations backed by trust-preferred securities, a type of security that many small banks invested in before the financial crisis.

A person briefed on the matter said the statement from four agencies, including the Federal Reserve and the Federal Deposit Insurance Corp., is intended to assure banks that the Volcker Rule could be amended to permit small lenders to continue holding the securities, known as TruPs CDOs.

If small banks were permitted to continue holding the securities until they recovered in value, the lenders would not be forced to take write-downs and a corresponding hit to their capital levels.

The banking industry has been lobbying to reshape or water down the Volcker Rule, which was initially intended to stop banks from speculatively trading with their depositors’ money. The rule was approved by regulators this month.

The statement from the regulators comes days after the American Bankers Association filed a motion in federal court in Washington seeking to suspend the provision of the rule that would appear to force small banks to sell the securities.

In a sign the parties were trying to reach an agreement, they filed a late-night motion that would delay the filing of additional papers in the lawsuit until Jan. 17.

In the lawsuit, the group said 275 small banks would sustain an imminent $600 million hit to capital, making them less likely to lend to consumers and businesses.

The provision came into the spotlight after Zions Bancorporation in Salt Lake City said Dec. 16 that it was taking a charge of $387 million to write down the value of its portfolio of the securities and was also reducing its regulatory capital levels after changing its accounting treatment for those securities.

It is not clear if any permanent exemption over the provision would apply to Zions, which has about $55 billion in consolidated assets. The typical community bank has less than $15 billion in assets, people briefed on the matter said.