Democrats push regulators for Volcker Rule fix

Democrats on the House Financial Services Committee are calling on regulators to exempt small banks from a hotly contested portion of the “Volcker Rule.”

Democratic members of the banking panel argued in a letter sent Tuesday to financial regulators that small banks that invest in a particular sort of security should have those investments exempted from the regulation.

{mosads}”A number of community banks have brought to our attention concerns. … We applaud your efforts to address these important concerns without undermining the safety and soundness of our banking system by weakening the rule.”

The letter, helmed by Rep. Maxine Waters, the top Democrat on the committee, could be seen as an attempt to cut off a brewing effort from committee Republicans to alter the Volcker Rule through legislation.

Chairman Jeb Hensarling (R-Texas) introduced legislation Tuesday night that would exempt certain collateralized debt obligations from Volcker Rule restrictions.

Democrats and financial protections proponents have long resisted any attempts to revisit the law out of fear that it could open the door to further changes and a potential weakening of the measure.

The push to rework the Volcker Rule comes just weeks after the regulation was finally issued by regulators. The rule, a centerpiece of the Dodd-Frank Wall Street reform law, is aimed at preventing mainly large banks from making risky trades in pursuit of profit.

But shortly after that massive effort was completed, some banks began to identify what they said was a dangerous oversight. They warned the rules could inadvertently force smaller banks to sell off what is known as trust-preferred securities (TruPS), potentially at a significant loss.

Industry groups have threatened legal action over the rule, arguing that smaller banks holding collateralized debt obligations backed by these securities would face substantial losses if the Volcker Rule applied.

After facing a legal threat from the American Bankers Association, regulators announced at the end of December that they would revisit the matter and potentially change the rule in the coming weeks.

That has not stopped Congress from weighing in, as Republicans push their bill and Democrats bring pressure on regulators to issue an exemption.

“We believe regulators have the authority to exempt banks with less than $15 billion in assets from the requirement to divest of TruPS CDOs, providing important relief to the community banking sector,” the Democrats wrote.

By making their plea directly to regulators, Democrats could be hoping to address the matter without having to support legislative changes to the law. Republicans have long been critical of Dodd-Frank, and particularly the Volcker Rule.

Hensarling’s panel is set to hold a hearing examining the Volcker Rule on Jan. 15 — the same day regulators have said they will decide on the TruPS issue.