Bank lobby threatens 'Volcker Rule' suit

A top banking industry group is threatening a lawsuit if financial regulators do not provide relief from the “Volcker Rule.”

In a letter sent to regulators Monday, the American Bankers Association called on the government to freeze a portion of the highly contested Dodd-Frank provision until industry concerns were addressed. If not, the group said it was prepared to go to court.

“If the rule is not suspended, we will shortly file a lawsuit challenging the rule ... and seeking emergency relief,” wrote the Frank Keating, ABA’s president and CEO. “We request, in the interest of fairness, that you issue a stay of these provisions, and that you keep this stay in effect until these issues are resolved, either through further dialogue or, if necessary, by the courts.”

At the center of the debate is how regulators treat trust-preferred securities. These securities were often sold by small banks before the financial crisis, and oftentimes were repackaged into collateralized debt obligations, or CDOs.

When regulators unveiled final rules implementing the Volcker Rule earlier this month, banks cried foul at how these securities would be treated under the rules. They argued that banks might have to unload these securities, and this wrinkle cracked down on small community banks, even though the intent of the provision was to ban risky profit-seeking trades from Wall Street giants.

“The financial harm, while dispersed throughout the industry and impacting some banking entities more than others, is real, imminent, and irreparable,” wrote Keating.

After the regulations were finalized, regulators sought to further clarify the issue by providing more guidance on these securities. They also gave smaller banks more time to come in compliance with the law, giving smaller banks additional time to determine exactly what steps they would need to take.

If banks are required to ultimately sell off those securities, they could face significant paper losses because they will have to be treated differently for accounting purposes and could lose their value.

Industry groups that called for relief called the further efforts from regulators insufficient, and now are threatening legal action.

This consequence of the Volcker Rule has also caught the attention of some lawmakers on Capitol Hill, as members of both parties have written to regulators asking that they make sure community banks are not adversely affected by the rule.

The finalization of the Volcker Rule marked a key moment for the implementation of Dodd-Frank. Regulators had spent years working on drafting rules outlining the provision, and had to sift through tens of thousands of comments from interested parties on the matter.