WASHINGTON BUREAU — Federal banking regulators plan to require large, international banking organizations to meet U.S. risk-based capital standards if those are higher than the Basel II RBC standards, or the Basel II RBC standards if those are higher than the U.S. standards.
The regulators will provide “limited flexibility” for insurance activities “that, in general, are not held by insured depository institutions, but may be held by depository institution holding companies or nonbank financial companies supervised by the Federal Reserve Board,” officials say in a final rule that is set to appear on in the Federal Register.
The “risk-based capital floor” rule would apply to the largest internationally active banking organizations.
The Basel Committee on Banking Supervision developed the Basel II RBC standards in an effort to strengthen RBC requirements for European banks.
It appears that the U.S. agencies’ new RBC requirements could apply to MetLife Inc., New York (NYSE:MET), a company that is organized as a bank holding company. The requirements also could affect bank holding companies that have insurance company subsidiaries.
The final rule was developed by the Federal Reserve Board, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency.
The agencies developed the rule to comply with Section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires the agencies to join together to develop minimum RBC standards for “covered institutions” — the “depository institutions, depository institution holding companies, and nonbank financial companies supervised by the Federal Reserve.”
The agencies received a total of 16 comments on the version of the rule that they proposed.
“Groups representing large banking organizations generally argued against the proposed permanent floor,” agency officials say in the preamble to the proposed rule. “These commenters asserted that it would place large U.S. banking organizations at a disadvantage relative to their international competitors, increase their costs, and undermine the risk sensitivity of the advanced approaches capital rules.”
A group for community banks and a group that describes itself as an advocate of financial reform supported the proposal, officials say.
“Commenters representing insurance companies generally supported the proposed revisions to the general risk-based capital rules for selected nonbank assets, arguing that insurance companies have different risk profiles and their liabilities and assets are of different durations compared to banks,” officials say. “These commenters said it would not be appropriate to mechanically apply bank capital regulations to insurance companies.”
Some commenters recommended that the agencies use established insurance industry RBC standards if they develop any new capital rules for insurers.
Some commenters asked the agencies to assign lower risk ratings to certain types of exposures, such as exposure to non-guaranteed separate accounts set up in such a way that the policyholder bears the investment risk. Insurance industry commenters also asked for low risk weightings for guaranteed separate accounts, corporate debt and private placements, officials say.
Some commenters also expressed alarm about the idea that federal regulators might force mutual insurers that have been using statutory accounting principles to switch to using the Generally Accepted Accounting Principles (GAAP) rules that public companies use.
Still others suggested that federal regulators should not treat a large insurer with a small bank the way it would treat a large bank, or an insurer that owns a large bank.
Dodd-Frank Act Section 171 “does not take into account the size or other differences between a holding company and its subsidiary depository institution(s),” agency officials say in the preamble.
Howard Mills, chief advisor to the insurance group at Deloitte, New York, says he is not surprised that insurance companies that are bank holding companies will face additional scrutiny and additional capital requirements.
The insurance industry is more concerned about the possibility that insurers with limited or no banking activities will receive additional oversight from the Financial Stability Oversight Council (FSOC), Mills says.
There likely will be different levels of federal regulatory scrutiny for insurers, with the level depending on matters such as size, interconnectedness, ownership of a thrift, and bank holding company status, Mills says.
Some insurers will be declared systemically important financial institutions (SIFIs) by the FSOC and regulated by the Fed, and others, Mills says, “will be left alone.”