Volcker rule tweaked in change to Dodd-Frank

Legislation to loosen the Volcker rule and allow banks to keep collateralized loan obligations (CLO) was easily approved by the House on Tuesday in a voice vote.

The bill would allow banks to keep any collateralized loan obligations that were issued before 2015, even though the Dodd-Frank financial reform law prohibits banks from making such investments.

This section of the law, known as the Volcker rule after its original proponent, former Federal Reserve Chairman Paul Volcker, is intended to protect consumers in case investments in securities by banks turn sour. The rule, one of the more contentious pieces of the Dodd-Frank financial reform law, would bar banks from making risky investments with their own funds.

Wall Street firms, however, had warned that many banks would face losses that could impact the rest of the financial system if the Volcker rule was not tweaked to allow banks to hold on to this particular type of security for more time.

Regulators have already proposed delaying the compliance period for CLOs until 2017.

Members of both parties described the measure as a narrow change to prevent a potential fire sale of CLOs.

“Today we have the opportunity to correct in a strong, bipartisan way an egregious example of regulatory overreach,” said Rep. Scott Garrett (R-N.J.). “If the CLO provision goes forward as planned, there will be a heavy price to pay.”

Rep. Patrick Murphy (D-Fla.) also touted the bill as a “narrow, common-sense fix to the Volcker rule without undermining its core purpose.”

But Rep. Michael Capuano (D-Mass.) said the legislative fix was unnecessary.

“We're pretending to save some great investment tool. It's not under threat,” Capuano said. “CLOs are not being killed. They're being limited in a very small way to only to target the most risky CLOs.”

Collateralized loan obligations are issuing entities of asset-backed securities, which primarily encompass commercial loans.

The House Financial Services Committee advanced the bill by a vote of 53-3 last month.

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