Zions Bancorporation announced that it believes that almost all of its CDO portfolio will be considered disallowed investments under the Volcker Rule. For those that follow such things, Dodd-Frank was federal government response to the financial crisis. As to whether it actually addressed the causes of the fiscal crisis, opinions vary.
The Volcker Rule, among other things, prohibits financial institutions from owning “speculative” investments and engaging in proprietary trading.
So, what does this do to banks and financial institutions? We mean in reality, not theoretically.
Zions’ stated that it will reclassify all covered CDOs that currently are classified as “Held to Maturity” into “Available for Sale.” Accounting mumbo jumbo. That’s it?
“The net result would eliminate substantially all of the accumulated other comprehensive income adjustment to equity related to the covered securities.”
More accounting mumbo jumbo. What does this really mean?
According to Zions, this results in:
- An estimated pro forma one-time non-cash charge to earnings of $629 million, pre-tax, and $387 million, after tax
- pro forma September 30, 2013 common equity Tier 1 ratio under Basel I rules would approximately equal 9.74%, down from the actual 10.47%
- pro forma September 30, 2013 GAAP tangible common equity to tangible assets would approximately equal 7.84%, down from the actual 7.90%
An earnings hit and a negative impact on regulatory ratios. Hooray progress!
But wait, there’s more. What happens when Zions goes to sell its portfolio?
“It is unclear what impact, if any, the divestitures mandated by the Volcker Rule across the bank and insurance trust preferred CDO asset class may have on trading prices; such prices are used in determining Zions’ fair value marks. Accordingly, the actual impact of the Volcker Rule may be materially greater or less than the impact estimated above.”
In other words, the flood of bad “speculative” securities on the books of financial institutions into the marketplace will cause prices to fall. This will obviously cause income and returns to fall, which can cause the values to fall even further. Death spiral alert!
Zions stated that is it evaluating multiple ways or combinations of ways to comply with the Volcker Rule requirements to optimize shareholder value. Good luck with that.