Banks’ Divestiture of CDO TruPS Investments Under the Volcker Rule? Still Unresolved
Washington, D.C. (Dec. 23, 2013)—The American Association of Bank Directors ('AABD') today urged the federal banking agencies to allow banks to retain their ownership in CDO TruPS investments.
'The federal banking agencies authorized banks to invest in CDO TruPS because they were investments in debt, not equity. The Volcker Rule shouldn't and doesn't change that result,' David Baris, Executive Director of AABD said.
In his letter to the heads of the three federal banking agencies, Baris wrote that just an indirect acknowledgement that all CDO TruPS investments may not be required to be divested 'is not nearly enough' at this point.
The letter noted that the final regulations were issued on December 10, only 21 days prior to the fiscal year end for most banks and bank holding companies. The agencies have suggested that each bank evaluate whether their CDO TruPS investments are subject to the final regulation that might force divestiture but reviewing the indentures and other documents relating to these investments at the last minute to determine, with the banks' accountants and advisors, whether their CDO TruPS investments may need to be divested can be a laborious and time-consuming process, complicated by imprecise language the agencies adopted in the final rule.
The letter further notes that the wording in the final regulations defining a key term ('ownership interest') was brand new, never vetted through the rule-making comment period process, thus taking the banking industry by surprise.
The immediate consequences to banks that invested in CDO TruPS can be severe, causing a sudden plunge in the value of these investments carried on their books, whether they sell or not, and significantly reducing capital and earnings.
'This is chaos created solely by the precipitous and untimely action of the agencies to adopt a rule that was not properly evaluated,' Baris said. 'The agencies have the power to right this wrong and make it clear immediately that CDO TruPS investments need not be divested.'
For more information, visit www.aabd.org.
Founded in 1989, the non-profit American Association of Bank Directors is the only trade group in the United States solely devoted to bank directors and their information, education, and advocacy needs. The Institute for Bank Director Education was established in 1993 as the educational arm of AABD. Its purpose is to act as a clearinghouse for education programs designed for bank and savings institution directors that support the nationally recognized Director Certification Program.