Banks back off on Volcker rule lawsuit

Regulators said to work with ABA for changes

The American Bankers Association is dropping its lawsuit challenging a provision of the Volcker Rule that requires community banks to divest their holdings in some collateralized debt obligations.

The industry group, which previously said banks would suffer losses of $600 million because of the provision, is working with regulators which have already made changes to the rule that “allowed many banks to avoid taking hundreds of millions of dollars in unnecessary writedowns,” Frank Keating, the president of the association, said in a statement.

Additional concerns can best be addressed “without the chilling impediment of pending litigation,” he said.

The rule named for former Fed Chairman Paul Volcker, who championed it as an adviser to President Barack Obama, was included in the 2010 Dodd-Frank Law that overhauled U.S. financial regulation as a way to restrict banks’ proprietary trading and other risky bets after the 2008 credit crisis. The Fed has given banks until July 21, 2015, to comply.

The bankers association, which represents mostly community banks, objected to a portion of the rule that would force lenders to get rid of CDOs backed by trust-preferred securities.

The association sued the Federal Reserve System, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency on Dec. 24 in a bid to block the rule from taking effect before the end of 2013. The association asked a judge Dec. 31 to put the lawsuit on hold after regulators said they were reviewing challenged aspects of the rule.

The group filed a similar complaint in the U.S. Court of Appeals in Washington because that court has jurisdiction over the Fed.

The district court case is American Bankers Association v. Federal Deposit Insurance Corp., 13-cv-02050, U.S. District Court, District of Columbia (Washington). The appeals court case is American Bankers Association v. Federal Reserve System, 13-1310, U.S. Court of Appeals, District of Columbia (Washington).

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