“The American Bankers Association said Wednesday that it would withdraw a legal request for emergency relief from a portion of the Volcker rule, a controversial regulation that bars banks from trading for their own benefit.

“The trade group filed a lawsuit in late December to block a provision of the rule that would have forced community banks to shed a commonly held investment, but dialed back the fight after government regulators amended the provision Tuesday. The bankers association, however, said it will not drop the lawsuit until it completes a full analysis of the rule.

“Late Tuesday, five regulatory agencies said banks with less than $15 billion in assets could retain collateralized debt obligations backed by trust-preferred securities (TruPS CDOs) — a financial instrument with hybrid characteristics of both debt and equity. The decision reversed a ban on banks owning such financial instruments.

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“Regulators did not heed industry calls to extend the exemption to another security used by big banks, collateralized loan obligations. These bonds, comprised of leveraged loans made to companies, are sold to traders in the credit markets as a way to distribute the risk of default across many partners.

“’Wall Street was hiding behind community banks on the TRuPS issue and were looking to bully regulators into creating a broad loophole to include CLOs,’ said Dennis Kelleher, chief executive of Better Markets, which advocates for financial reform. ‘But what regulators sensibly did was to provide very narrow and specific relief.’”

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