The American Bankers Association (ABA) said Wednesday it would drop a lawsuit challenging a provision of the Volcker Rule mandating community banks to divest their holdings in some CDOs.

Volcker Rule Paul Volcker ABA

ABA’s threat against Volcker Rule

In December, the American Bankers Association urged regulators to scrap new provisions under the Volcker Rule, threatening legal action if the agencies mandate a portion of Volcker Rule relating to some collateralized debt obligations. The ABA said in a federal court filing that it was seeking relief from a portion of the regulation that analysts, bankers and lawyers have said may force some financial institutions to dispose of certain types of investments which could result in write-downs for lenders.

Zions Bancorporation of Salt Lake City too had anticipated that the Volcker Rule would force it to take a hit on its portfolio of CDO, showing it is not just big banks who will be impacted by the recent rule. Some analysts pointed that the Volcker Rule would force Zions Bancorporation to reclassify the entirety of its predominantly bank and insurance Trust-Preferred CDO portfolio as ‘Available for Sale’ and Zions Bancorporation will record a $629 million pre-tax non-cash charge to 4Q13 earnings, translating into a post-tax charge of $387 million.

Regulators’ exemption

Last month, Federal banking regulators responded to the Independent Community Bankers of America’s repeated calls for them to take action to rectify a Volcker Rule provision that could negatively affect hundreds of community banks. The regulators’ proposition would exempt from the Volcker Rule all CDOs backed by trust-preferred securities that were issued by banks with less than $15 billion in assets.

ABA dropping lawsuit

Following the regulators tweaking the rules, ABA said it would drop its lawsuit challenging part of the Volcker Rule.  ABA’s president Frank Keating said some of the banks might still have to sell, but “we believe the best opportunity to pursue successful resolution of these issues is to constructively engage with the regulators without the chilling impediment of pending litigation”.