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Just days after the Federal Reserve and other bank regulatory agencies finalized the “Volcker Rule” under the Dodd-Frank Act, one large bank has reacted in a big way.
Zions Bancorporation has determined that substantially all of its portfolio of bank and insurance trust preferred collateralized debt obligation (CDO) securities, and certain other asset-backed CDO securities, would be considered disallowed investments under the Volcker Rule.
Because it would no longer have the ability to hold disallowed securities until the anticipated recovery of their amortized cost – the final rule requires divestiture of disallowed investments by July 21, 2015, with possible extensions to July 21, 2017 – Zions has decided that it now would reclassify all covered CDOs that it is holding as “Held to Maturity” into “Available for Sale” and that it would adjust the value of all of its covered CDOs.
The bank said that, applying this accounting treatment to its September 30, 2013 financial statements on a pro forma basis, and using its valuation of these securities as of that date, would result in:
These and other capital ratios are summarized in the following table:
12/ 31/2012 9/30/ 2013 9/30/2013
Actual Actual Pro forma
Common Equity Tier 1 Capital 9.80% 10.47% 9.74%
Tier 1 Risk-Based Capital 13.38% 13.10% 12.40%
Total Risk-Based Capital 15.05% 14.82% 14.13%
Tangible common equity ratio 7.09% 7.90% 7.84%
According to Zions, all regulatory ratios were calculated under the Basel I rules and all pro forma September 30, 2013 ratios were calculated using actual balances of CDOs as of December 13, 2013, but using valuation assumptions from the third quarter of 2013.
In a statement, Zions said that it was “unclear” what impact, if any, the divestitures mandated by the Volcker Rule across the bank and insurance trust preferred CDO asset class might have on trading prices, which it uses in determining Zions’ fair value marks. Accordingly, Zions said, the actual impact of the Volcker Rule may be materially greater or less than the impact it has estimated.
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