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Regulators Trim Portion Of Volcker Rule After Banks Complain

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Former Federal Reserve Board Chairman Paul Volcker, who currently serves as economic adviser to President Obama, adjusts his glasses while testifying on Capitol Hill in Washington, Wednesday, March 17, 2010, before the House Financial Services Committee. (AP Photo/Pablo Martinez Monsivais) | ASSOCIATED PRESS

WASHINGTON (Reuters) - Five U.S. bank regulatory agencies on Tuesday approved a tweak to the Volcker rule that would allow banks to keep interests in certain funds backed by trust-preferred securities.

The change was aimed at easing the concerns of small banks that they needed to dump certain investments they thought would be allowed under the rule, losing money in the process.

The American Bankers Association, or ABA, a bank trade group, sued regulators, and lawmakers from both parties have backed the banks.

After regulators announced the revision, the bankers group said it was considering the change and would decide on Wednesday whether to continue with its lawsuit.

"ABA commends the regulators' speed and judiciousness in revisiting the impact of the Volcker rule. Their action today should allow banks to avoid taking millions of dollars in unexpected and unnecessary write downs," the group said in a statement on Tuesday.

The Volcker rule, which was required by the 2010 Dodd-Frank law, prohibits banks from making speculative bets with their own money and restricts their investments in certain funds. Five agencies, including the Federal Reserve and the Federal Deposit Insurance Corp, were involved in writing the rule.

Smaller banks claimed that, as an unintended consequence of the final version, they would need to dump funds backed by trust-preferred securities, or TruPS, which have hybrid characteristics of debt and equity.

On Tuesday, regulators said banks could keep certain collateralized debt obligations backed by TruPS established before May 2010 and obtained before the Volcker rule was finalized last month.

The agencies also said banks can continue to act as market makers in the TruPS-backed funds. Banks have 30 days to comment on the changes after which regulators have the power to make additional tweaks if necessary.

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