WASHINGTON — In the space of just a few hours, regulators issued — and banks condemned — guidance meant to clarify the impact of the Volcker rule on small institutions.

The trading ban, which prohibits banks from taking risky bets with taxpayer funds, limits banks' ability to hold collateralized loan obligations and collateralized debt obligations. Shortly after it was finalized last week, at least three banks signaled they planned to sell such CDOs, potentially at a significant loss, prompting widespread concern across the industry.

In a release late Thursday, regulators detailed Frequently Asked Questions specifying that banks with trust-preferred CDOs do not have to sell such holdings immediately, but can take time to figure out how they can be permitted under the rule. The Volcker Rule does not go into effect until July 21, 2015, after regulators extended the compliance date by an additional year when they finalized the rule on Dec. 10.

Yet banking groups almost immediately rejected the guidance, saying it did little to address the underlying problem.

"It is a disaster," said Camden Fine, president of the Independent Community Bankers of America. "The FAQ put out by the regulatory agencies today does nothing to get the banks out from under the threat of having to take significant charge offs of capital at year end. Our banks had no warning, no advanced notice, no way to prepare for this. The regulators just laid this bomb on them less than three weeks before year end. It is the financial equivalent of Pearl Harbor."

At issue are whether banks are required to shed some trust-preferred holdings and how quickly. After the Volcker Rule was released, some said the rule requires banks to make accounting adjustments by yearend, rather than by the 2015 deadline. Three banks indicated plans to sell such securities: BankUnited (BKU) in Miami Lakes, Fla.; Cape Bancorp (CBNJ) in Cape May Courthouse, N.J.; and Zions Bancorp. (ZION) in Salt Lake City, Utah.

"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," Zions said in a press release after revealing it may take a $387 million charge on its portfolio of CDOs.

Industry groups instantly sent letters to regulators asking them to clarify the situation while lawmakers also leaned on the agencies to act.

"If the regulators stand by the misdirected application of the Volcker Rule to community bank Trups, the impacts could be devastating to shareholders and the capital of a large number of community banks across the country," said Sens. Mark Kirk, R-Ill., Joe Manchin, D-W.Va., and Roger Wicker, R-Miss., in a letter to regulators on Thursday. "These banks would be required to recognize a write-off in the current quarter for any unrealized losses from holding the security and would be required to liquidate the security by July 2015."

The regulatory guidance by the Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency was apparently designed to assuage those worries. The three-page document details a 6-step checklist to determine what trust-preferreds will be covered by the Volcker Rule. It also specifies what actions institutions could take to make them compliant without selling them off.

"If the Trups CDO vehicle is restructured such that it becomes an entity that is not a covered fund during the conformance period, divestiture is not required," regulators wrote.

Yet analysts said regulators fell well short of what banks wanted.

"This is not the clear statement that banks had been looking for," said Jaret Seiberg, an analyst with Guggenheim Securities. "There is no explicit exemption for owning the debt portion of the CDO backed by trust preferred securities. As a result, we expect the banks will be disappointed with this guidance."

Several industry groups echoed that sentiment.

"ABA is dismayed that the regulators have not found a resolution to address the disruptive consequences of the Volcker rule on community banks," said Frank Keating, the president of the American Bankers Association, in a press release. "Community banks were reassured that the Volcker rule wouldn't affect them, as they pose no conceivable systemic risk, but they have found out otherwise — and with only two weeks before the end of the year. The consequences of this unexpected bureaucratic bombshell are millions of dollars in losses that will undermine affected banks' ability to serve their customers and communities."

Tim Pawlenty, the CEO of the Financial Services Roundtable, said that "this guidance does not provide the relief or the clarity the industry needs."

"Many financial institutions will still see no other option than to sell their Trups funds immediately at likely sizable losses," said Pawlenty. "Additionally, the regulators did not answer questions regarding collateral loan obligations that need to be clarified. We will continue our outreach to regulators on these issues."

Donna Borak is the Federal Reserve reporter for American Banker.