By Douwe Miedema
WASHINGTON (Reuters) - The U.S. Federal Reserve will give banks two more years to divest collateralized loan obligations (CLOs) that fall under the Volcker rule, a part of the Dodd-Frank financial law that bans banks from making a range of risky investments.
The Fed said banks will now have until July 21, 2017 to shed these funds, which pool together risky loans.
CLOs are a way for banks to remove loans from their balance sheets by selling the exposure to other investors, a form of securitization. Those investors can be other banks.
But the Volcker rule, part of the 2010 Dodd-Frank financial reform law, caps banks' ability to invest in risky funds such as hedge funds and private equity funds to 3 percent, and some CLOs fall under this rule.
The loans held in CLOs are high-yielding, and are generally used in leveraged buy-outs, to finance the acquisition of a company by a private equity firm.
Issuers of CLOs had been holding back this year, with year-to-date new volume 40 percent lower than a year ago, because of the regulatory uncertainty.
Even with the delay, the rule would lead to sharp losses for banks, the Loans Syndications and Trading Association said.
"Considering the amount of CLO notes that would have to be sold ... investors should be able to demand a punitive price," it said in an emailed statement. "This would drive significant realized losses for the banks."
In January, five regulatory agencies approved a tweak to the Volcker rule that would allow banks to keep interests in certain funds backed by trust-preferred securities.
Congressman Scott Garrett, who chairs a House panel on capital markets, has asked U.S. financial regulators to go back to the drawing board on writing regulations to enforce the Volcker rule, also citing he expected losses for the banks.
The Volcker rule, part of the 2010 Dodd-Frank financial law aimed at preventing another financial crisis, prohibits banks from making speculative bets with their own money.
Bankers and some members of Congress objected to the rule, and have pressured U.S. agencies charged with writing the regulations under which the rule will be enforced.
The four other U.S. regulators co-deciding on the Volcker rule would grant a similar delay, the Fed said.
They are the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC)
(Reporting by Douwe Miedema; Editing by Alden Bentley and David Gregorio)