Once again, the Federal Reserve is giving banks a reprieve from the Volcker rule. Its Board of Governors has agreed to offer them an additional two years to unwind their ownership and sponsorship interests in collateralized loan obligations.

CLOs, securitization vehicles backed by commercial loans, are among the financial instruments prohibited by the Volcker rule, a ban on proprietary trading by federally insured banks and a prohibition on relationships with hedge funds and private equity funds. The rule, included in the Dodd-Frank Act, directed the Federal Reserve to establish a conformance period for banks to unwind those assets. It has already issued one extension, until July 21, 2015. In order to “ensure effective compliance,” the Fed now says banks will be allowed two additional one-year extensions, which together would extend until July 21, 2017.

Only CLOs in place as of Dec. 31, 2013 would be eligible for the extensions, which the Fed intends to act on in August of this year and next. Banks will not have to include ownership interests in CLOs to determine investment limits under the final rule. They will also not be required to deduct them from tier 1 capital during the extension period. The decision was made in consultation with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, a statement says.

The extensions are a partial concession to the concerns raised by banks, trade associations, and some members of Congress and their call for more permanent relief.  “We appreciate that regulators have recognized there is an issue with CLOs under the Volcker Rule,” said Frank Keating, president and CEO of the American Bankers Association, in a statement. “However, the extension doesn't address the underlying problem. These instruments, and others like them, were created and exist to meet customer needs, not for proprietary trading purposes, nor are they investments in hedge funds. We continue to be puzzled that they are covered by the Volcker rule.”

In January, with the first major alteration to the Volcker rule, regulators approved an interim final rule that allows banks with less than $15 million in assets to retain their interests in collateralized debt obligations backed by trust preferred securities. To qualify for the exemption, the CDOs must have been established before May 19, 2010, with the bank's interest acquired on or before Dec. 10, 2013.

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