The federal banking agencies issued the long awaited Volcker Rule, which restricts a “banking entity” from engaging in proprietary trading and having connections with hedge funds, private equity funds, and certain other private funds. The rule permits hedging activities as long as the activity is designed to mitigate risks, and excludes from the definition of covered funds the securitization of loans and other credits.

Compliance is mandatory as of July 21, 2015, but banks are required to make good faith efforts to develop compliance with the rule. A bank under $10 billion in assets that does not engage in proprietary trading or “covered fund” activity would have no compliance program requirements.

It is important to note that under the rules approved a week ago, collateralized debt obligations that are backed by Trust Preferred Securities (TruPs) are considered “covered funds” subject to the Volcker Rule’s restrictions. The resulting accounting treatment will cause banks of all sizes that use TruPs to support these debt obligations to potentially face significant capital charges.

Upon the issuance of the rules, CBA joined the American Bankers Association and other state banking associations to urge federal regulators to address the unintended consequences of the TruPS treatment under the Volcker Rule regulations. The CBA, was a signatory to a letter authored by the ABA, to Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corporation Chairman Martin Gruenberg and Comptroller of the Currency Thomas Curry, urging swift action on this important issue. 

Unfortunately, the regulatory agencies subsequently released guidance in the form of a “frequently asked questions” document last Thursday that did not provide clarifications that CBA, other state banking associations and the ABA were seeking with regard to TruPS treatment. CBA will continue its work with ABA and other state banking associations to urge banking regulators to revisit and resolve this significant matter.

Please visit the following link to the Federal Reserve Board’s resources on the Volcker Rule, which includes a Community Bank Guide:  www.federalreserve.gov/newsevents/press/bcreg/20131210a.htm