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US bank group challenges Volcker rule in court

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December 28
12:14 PM 2013

The American Bankers Association filed a lawsuit, challenging the final version of the Volcker Rule and saying that the divestment of small banks' holdings in collateralized debt obligations will incur some $600 million in losses.

According to the complaint filed in a Washington federal court yesterday, the community banks representative objected to a clause in the rule that will require lenders to get rid of the assets backed by trust-preferred securities. The association is seeking a court order to block the implementation of the rule before the year ends.

Part of the complaint read, "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 final version of the rule named after former Fed Chairman Paul Volcker, who has pushed the ruling to President Barack Obama when he was an adviser, was endorsed by several government agencies, namely the US Federal Reserve System, Federal Deposit Insurance Corp., Securities and Exchange Commission, Commodity Futures Trading Commission and Office of the Comptroller of the Currency. A Bloomberg report pointed out that the final version approved by such government agencies included CDOs as an example of covered funds that are banned for investment.In yesterday's complaint, the Federal Reserve, the FDIC and the OCC were named as the lawsuit's defendants in the complaint.

Independent Community Bankers of America President Camden Fine said, "(More than 300 banks are) likely to take losses in their capital accounts (if forced to write down the securities.) 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," according to yesterday's complaint. "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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