Lawmakers are gearing up to intervene if regulators fail to resolve ongoing concerns about the treatment of collateralized debt obligations backed by trust-preferred securities under the Volcker Rule.
Reps. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, and Shelley Moore Capito, R-W.V., are working on a bill that would provide a broad exemption to existing Trups-backed obligations, which they plan to introduce on Tuesday, according to a spokesman for the chairman.
Efforts on the Hill to address the problem may serve multiple purposes, including possibly forcing the regulators to act faster and in a more sweeping manner to resolve the issue. The legislation also provides another recourse for banks if they are unsatisfied with how the agencies handle the situation.
Regulators are trying to issue an interim final rule by the end of the week that would prevent hundreds of banks from either selling or significantly writing down the value of the CDOs due to the Volcker Rule.
"We want to demonstrate to regulators that this is a top priority, a serious concern for Congress to make sure that this thing is fixed," said Paul Merski, executive vice president for congressional relations and chief economist at the Independent Community Bankers of America. "It's also a backstop if the regulatory fix is not good enough. If the regulators don't fix this properly, there's support to quickly enact legislation."
Lawmakers on both sides of the political aisle have raised concerns with the issue since the Volcker Rule was finalized on Dec. 10, and the banking industry has thus far presented a largely united front in pushing for a broad exemption for all institutions. Still, regulators have considered a much narrower change, exempting Trups-backed CDOs for institutions with less than $15 billion of assets.
Merski added that he's hopeful the Senate will introduce legislation as well. Several members, including Sens. Mike Crapo, R-Idaho, Mark Kirk, R-Ill., Joe Manchin, D-W.Va., and Roger Wicker, R-Miss., penned letters to regulators before the holiday recess expressing their concern about the unintended consequences of the provision, though it's yet unclear if any of those lawmakers will take legislative action.
At issue is whether banks are required to shed CDOs made up of Trups and how quickly. Under the final Volcker Rule issued in early December, regulators said that certain Trups-backed CDOs would be considered "covered funds," meaning that banks would not be able to hold ownership interests, sponsor them or extend credit to them.
That has sparked several banks to announce plans to write down or sell such assets immediately, some at a substantial loss, despite the fact that the Volcker Rule does not go into effect until July 2015.