The Volcker Rule and the Demise of Community Banking

For nearly 25 years, I have had the privilege of being at the helm of a banking association. During that time, three events stand out that were difficult to deal with, extremely unfair to the business of banking, and/or totally infuriating.

The first was the financial crisis in 2008, with which the world continues its struggles. The second was Congress’s predictably wrong-minded response to the financial crisis: passage of the Dodd-Frank Act. The third, related to the first two, occurred just last week. With the recent release of the Volcker Rule from the Dodd-Frank Act, the first casualties appear to be community banks, despite congressional and regulator assurances that no harm would come to community banks as a result.

Hours after the Dec. 10 release of the Volcker Rule, community bankers discovered, to their dismay, that a provision would cause any collateralized debt obligations (CDOs) that are backed by trust preferred securities (TruPs) as the underlying asset to be considered disallowed investments. This final rule — issued without the normal due process of a public comment period — requires all banks to divest of such securities by July 21, 2015. However, accounting rules require that these assets that have been classified as “held to maturity” now be reclassified into “available for sale” and be adjusted to fair market value through an other-than-temporary impairment (OTTI) noncash charge to earnings.

While initially TruPs languished in the post-financial-crisis era, they continue to come back strong. However this rule will create more sellers than buyers in the marketplace, thus driving fair market value down. In Indiana, 16 banks hold these assets and will collectively take a hit to earnings amounting to $60 million.

Last week the prudential national banking regulators swept swiftly into action and, on Dec. 19, issued a FAQ document to clarify options that these banks might have. Regretfully the FAQ provided no relief for community banks. We continue to debate what courses of action may be available to shield innocent community bank victims from the arrogance of these regulators.

For months these same regulators have been assuring community bankers that no harm would come to them. For the past year or more, these same regulators have publicly issued support for the community bank model and pledged to create a bifurcated regulatory system that recognizes the differences in business models by different banks.

Instead of matching action to promises, they instead displayed their hubris by thumbing their noses at the very banks they pledged to help. Bernanke of the Federal Reserve, Gruenberg of the Federal Deposit Insurance Corp. and Curry of the Office of the Comptroller of the Currency should be ashamed of themselves. There is simply no explanation for their actions or, more appropriately, inactions.

I am furious, and everyone else involved in the business of banking should be furious, too. To the credit of lawmakers, Indiana Senators Donnelly and Coats, as well as the Indiana Republicans in the U.S. House of Representatives, sent letters to all three regulators, seeking a real solution. Apparently these regulators do not care, since by their deeds they have proven that the United States is very near to being a socialist society, where government determines who are winners and who are losers. It is a sad day in the United States, and I for one am tired of going in the wrong direction!

For almost a quarter of a century, I have had the honor of serving the banking community. Never before have I been so enraged on its behalf.

2 Responses to The Volcker Rule and the Demise of Community Banking

  1. Jerry House MD says:

    This regulatory zeal will diminish loans by community banks and further strangle a jobless recovery.

    Jerry House MD

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