Regulators face legal threat on Volcker The American Bankers Association on Monday threatened to file a lawsuit against US regulators if they do not suspend a provision in the Volcker rule that has sparked protests among small lenders. As many as 300 banks could record billions of dollars in losses because of the Volcker rule's treatment of what are known as trust preferred securities (TruPS), which banks believe they have to divest because of the new rule. "The financial harm is real, imminent and irreparable," ABA chief executive Frank Keating wrote in a letter to the heads of the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The Volcker rule, which was approved by regulators on December 10, is the most contentious mandate to come out of the Dodd-Frank financial reform bill of 2010. The measure bans proprietary trading and was aimed at reining in the risky behaviour of the world's largest banks. The ABA said if regulators did not issue a stay on the Volcker provisions regarding TruPS, it would file a lawsuit seeking emergency relief before the end of the year. "The Volcker rule wasn't intended to cause community banks to take all these losses," said Wayne Abernathy, an executive vice-president at ABA. This was supposed to be about systemic risk. Last week Utah's largest bank, Zions Bancorp, said it would have to take a $387m post-tax charge on its portfolio of TruPS, which led to a lobbying campaign by the ABA, the Independent Community Bankers of America and other trade groups. On Thursday, the FDIC, the Fed and the OCC issued a frequently asked questions notice on how to handle banks" TruPS portfolios, an unusual move by regulators that reflected their concern over the issue. The regulators declined to comment on the ABA's letter. The agencies suggested banks look at restructuring the portfolios to conform with the Volcker rule or revise them so the investment was not deemed as an ownership interest, which is restricted under the measure. But accountants for the banks said that did not solve their immediate problem. Reclassifying them as available-for-sale, in preparation for an eventual divestment, would lead to paper losses and potentially affect the banks" regulatory capital ratios. Many banks said they would have to write down a loss before the end of this year. Regulators said they were continuing to study the TruPS issue but it is unclear whether they will make any further moves, especially over the holidays. Wall Street has also been considering a legal challenge to the Volcker rule, which could be led by Eugene Scalia, a partner at law firm Gibson Dunn and son of US Supreme Court Justice Antonin Scalia.