The American Bankers Association objects to a portion of the Volcker rule that will force lenders to get rid of CDOs backed by trust-preferred securities. The complaint was filed in federal court in Washington D.C. and the lawsuit challenges claims that the requirement of small banks to divest their holdings in some collateralized debt obligations will cost them about $600 million in losses.
The Volcker Rule refers to part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers. Volcker was appointed by President Barack Obama as the chair of the President’s Economic Recovery Advisory Board.
The Volcker Rule was first publicly endorsed by U.S. President Obama on January 21, 2010. The proposal specifically prohibits a bank or an institution that owns a bank from engaging in proprietary trading that is not at the behest of its clients, and also from owning or investing in a hedge fund or private equity fund, and also limits the liabilities that the largest banks can hold. Too many liabilities makes banks riskier investments, and also changes the atmosphere of the financial markets in many macroeconomic ways.
Camden Fine, Independent Community Bankers of America president, had stated that day that more than 300 banks are “likely to take losses in their capital accounts” if forced to write down the securities. According to Bloomberg News, The American Bankers association seeks a court order blocking the Volcker rule from taking effect before the end of the year. “This would have a devastating impact on their prospective borrowers, including on the many small businesses that rely on local community banks,” reported Fine. On December 10, 2013, the Volcker Rule was approved by all five of the necessary financial regulatory agencies. It is set to go into effect April 1, 2014.
Image Credit: www.occupyforaccountability.org