The financial harm is "real, imminent, and irreparable," says the American Bankers Association of a Volcker Rule provision restricting bank ownership of certain CDOs of trust-preferred securities. At least three smaller lenders - Zions Bancorp (ZION +1.8%) being the most prominent - have said they would have to write down or sell such assets immediately at a substantial loss.
It's an accounting issue: If these assets are covered by Volcker, lenders must move them from the held-to-maturity bin to the available-for-sale bin, and take the necessary marks in the process.
"Banking entities investing in pooled Trups that do not pose the kind of systemic risk the Volcker rule is intended to capture are facing unexpected and precipitous write-downs on these investments that are not justified by any safety and soundness concern," says the ABA. "The effect of the Volcker rule on banking entities holding these investments is itself causing safety and soundness concerns." Unintended consequences? Who could have guessed?