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Banking groups urge regulators to address Volcker Rule’s unintended consequences on TruPS

200px-American_Bankers_Association_LogoIn a Tuesday letter to banking regulators, the American Bankers Association and state banking organizations to address unintended consequences of the recently finalized Volcker Rule on trust preferred securities.

TruPS are generally longer term securities with early redemption features, and they mature at face value. According to a summary of the Volcker Rule—which prohibits financial institutions and affiliates from ownership interest or sponsorship of “covered funds”—released by the ABA, many TruPS rely on exceptions and are generally considered “covered funds.”

Under the rule, TruPS investments must be sold, a move the ABA said will have “significant accounting consequences no matter when these investments are expected to be divested.”

Banks will be required, according to the ABA, to treat fair value losses on covered TruPS investments as realized losses.

“As we continue to receive information from our member banks, reports indicate that a variety of community and midsize banks will suffer significant unexpected hits to earnings and even to capital,” the groups said in a letter to the FDIC, Federal Reserve and OCC.

The groups said the issue is urgent because of the approaching end of the calendar year.

“Even though the provisions of the regulations are scheduled to go into effect in 2015, accounting practices triggered by the implementing regulations could subject many banks to imminent financial losses,” the groups said.

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