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American Bankers Association challenges Volcker Rule

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December 25
11:45 PM 2013

A US bank group filed a lawsuit against the final version of the Volcker Rule, claiming that the rule's requirement for small lenders to exit their holdings in some collaterized debt obligations or CDOs will cause them to lose around $600 million, Bloomberg reported. The American Bankers Association filed the complaint in a Washington federal court yesterday, objecting to the part of the rule that compelled lenders to divest of their CDOs which were backed by trust-preferred securities.

An association that represents mostly community lenders, the American Bankers Association is asking the court to block the rule from taking effect before the year ends.

The complaint said, "Without the requested relief, hundreds of community banks across the nation will be required to recognize unexpected and, in many cases, significant earnings and capital losses on or before December 31, 2013."

The Volcker Rule was named for Paul Volcker, former Fed Chairman who advocated for it as an adviser to President Barack Obama, the report said. The rule became part of the 2010 Dodd-Frank Law that revamped US financial regulation as a method of curbing the proprietary trading and other risky bets of banks after the credit crisis of 2008. Lenders have been given until July 21, 2015 by the Federal Reserve to comply with its provisions, the report said.

The Federal Reserve System, Federal Deposit Insurance Corp, Securities and Exchange Commission, Commodity Futures Trading Commission and Office of the Comptroller of the Currency approved the final version which included CDOs in the meaning of covered funds that were part of the restriction. The complaint of the American Bankers Associated named the Fed, FDIC and the OCC as the defendants.

The complaint also said, "If hundreds of small, community banks are unexpectedly required to take significant capital losses on December 31, 2013, they likely will be forced to immediately decrease their lending activity. This would have a devastating impact on their prospective borrowers, including on the many small businesses that rely on local community banks."

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