The Federal Reserve Board announced last month that it is considering delaying implementation for the annual company-run stress test requirements until September 2013.
The delay would apply to insurers that have thrift holding companies, as well as banks, with between $10 billion and $50 billion in total consolidated assets. Insurers with thrifts—any savings and loan holding company, in fact—would have a lower threshold of $10 million in assets once those holding companies become subject to minimum risk-based capital requirements.
MetLife, Inc. (NYSE: MET) owns a bank–it is a bank holding company–which it is trying to sell before full Dodd-Frank Act implementation. MetLife was one of four large financial institutions deemed to have failed a “stress test” in March, a decision then roundly criticized by MetLife and insurance analysts.
In MetLife’s reaction to the Fed decision, Steven Kandarian, chairman, CEO and president, said that amongst the things MetLife was penalized for was the holding of funds of variable annuity customers in separate accounts. It is likely that it will resubmit a capital plan this month.
MetLife, according to LIMRA, is the largest seller of VAs that offer “living benefits” payouts. Kandarian also said that the Fed’s methodology unfairly resulted in “harsh treatment” for MetLife’s corporate bond portfolio.
Industry analysts and insurers said the decision was based on evaluating MetLife by using criteria used to evaluate banks and not insurance companies, and insurers are concerned about the Fed continuing to use a bank-centric model on insurers as it expands its supervision under Dodd-Frank.
Stress tests are required under the 2010 Wall Street Reform and Consumer Protection Act.
The December 2011 Federal Reserve proposal would require the subject institutions to comply with the requirements to conduct an annual company-run stress test beginning on the effective date of the final rule. There is no timeline for a final rule, yet, and it is clear that the Fed is only considering a delay—it hasn’t allowed one, yet.
According to the Fed, many interested parties raised concerns about the proposed timing of compliance with the company-run stress test requirements, specifically questioning if all institutions would have the resources, readiness, and ability to conduct stress tests given the likely short period between the publication of a final rule and the start of the stress testing process.
Companies must have robust systems and processes to conduct the stress tests in the first place. A delay would help ensure that these companies have sufficient time to develop high-quality stress testing programs.