December 7, 2011 / 12:24 PM / 8 years ago

U.S. banks seek to avoid Volcker rule "fire sale"

WASHINGTON/CHARLOTTE (Reuters) - U.S. banks want regulators to give them more time to liquidate investments in certain private equity funds under the Volcker rule, arguing that without more leeway they will have to hold “fire sales.”

The Volcker rule, a part of the 2010 Dodd-Frank financial oversight law that tries to make the financial system safer, greatly restricts the amount banks can invest in hedge and private equity funds.

Banks already have been trying to shrink their private equity portfolios.

But they fear certain funds with a longer time horizon, such as those tied to real estate, will take longer than the general timeframe of five years laid out in the Volcker rule to sell the assets at decent prices.

“You are going to have to go out and sell to third parties, who are not banking entities, that are salivating, just waiting for this to happen because all of these interests will be sold at significant discounts,” said one bank executive, who asked that neither he nor his bank be identified so he could talk freely about their planned appeal to regulators.

Supporters of the law dismiss these concerns and said banks are simply trying to get a break and weaken the Volcker rule.

“If you can’t sell something in five years it really raises a more fundamental issue as to how it is being valued,” said Dennis Kelleher, president of Better Market, a non-profit group that supports the Volcker rule.

Wayne Abernathy, a top official with the American Bankers Association, said part of the concern is that if banks all get out of certain assets at the same time there will be liquidity problems in those markets.

“Who’s going to pick up the slack quickly enough so the markets don’t see a big hiccup,” he said.

Bank analysts said it is difficult to determine how much money is at stake given the timeframes involved and the arcane nature of what funds would be impacted.

The issue may turn out to be more about the money banks will not make rather than what they will lose by having to sell. “What they’re giving up is a potential for future return,” said Marty Mosby, a bank analyst with Guggenheim Securities.

Banks have been quickly winding down their private equity portfolios due to new regulatory requirements, including the Volcker rule, but still have sizable exposures.

For instance, at the end of the third quarter the book value of BofA’s private equity investments was $1.8 billion (1.15 billion pounds).

That compares to $4.8 billion a year earlier.

But they fear they have already sold off the low-hanging fruit and that the remaining investments will take a longer time to offload at good prices.

An official at another large bank, who asked not to be identified, complained that selling assets at a low price could hurt efforts to raise the capital required by regulators.


The specific issue banks plan to lobby is how to define “illiquid funds,” the bank executives said.

Dodd-Frank gives banks two years to liquidate most of their holdings in hedge and private equity funds. A bank can then apply for three one-year extensions bringing the total amount of time to divest to five years.

The law, however, allows regulators to give banks an additional five years to comply with the law for “illiquid funds.” That concession came in response to bank complaints during the drafting of Dodd-Frank about how investments like those in real estate could be impacted.

The lobbying push focuses on how to define illiquid so more funds can get the additional five years. It is a fight the banks have already lost once, they said.

In February the Federal Reserve released a final rule to govern the time periods for complying with the Volcker rule.

Bank executives were unhappy with the Fed’s policy, arguing it defined “illiquid funds” so narrowly that few investments would meet the standard, the bank executives said.

Large banks now want to revisit this decision as part of the regulation, proposed in October, that agencies are finalizing to implement the broader details of the Volcker rule. Regulators are seeking input through January 13.

Along with the restrictions on investments in hedge and private equity funds, the Volcker rule would prevent banks that receive government backstops like deposit insurance from making risky trades with their own funds in securities, derivatives and other financial products.

The rule was named for former Fed Chairman Paul Volcker, who championed the measure.

Like most of the Volcker rule the issue of timing and funds would have the most impact on the largest banks, such as Goldman Sachs (GS.N), Bank of America (BAC.N) and JPMorgan Chase (JPM.N).

Part of the discussion in the industry right now, according to bank officials, is whether individual banks should make the case to regulators or leave it to their lobbying groups.

But the industry is already perfecting its pitch that rushed sales could hurt the economy.

“Generally speaking, the more time banks have to divest positions in hedge funds and private equity funds...the better it will be for avoiding negative market implications and depleting asset prices,” said Tim Cameron, head of the Securities Industry and Financial Markets Association’s Asset Management Group, it lobbies on behalf of large banks.

Reporting by Dave Clarke and Joe Rauch; Editing by Carol Bishopric

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