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U.S. banking regulators delay Basel III capital rules applying to insurers' thrifts, banks

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The three U.S. federal banking agencies said today they are delaying the effective date of proposed rulemaking that would revise and replace the current regulatory capital rules, collectively known as Basel III. The proposals had given an effective date of January 1, 2013 and insurance companies with thrifts are to be subject to the new capital rules, as well, when they are effective.

Fed regulators, led by the Board of Governors of the Federal Reserve System, will use the capital standards to provide consolidated regulation of insurers which operate thrifts. The rules were proposed in June and a comment period given, then delayed until Oct. 22 after pressure from banks, insurers and a Congress unhappy with the new standards and the short time frame.

The proposal would subject institutions that have thrift holding companies to the same capital standards as banks at the holding company level, except for certain unique insurance activities.

Many industry participants had expressed concern that they may be subject to a final regulatory capital rule on Jan. 1 without sufficient time to understand the rule or to make necessary systems changes, the federal regulators said. Among these were major insurers with thrifts, Washington-based associations and the NAIC. 

The insurance industry paused long enough to breathe a sigh of relief before reminding the banking regulators that capital standards that don’t fit insurers had no place in insurance solvency supervision.

“The agencies’ decision to delay implementation of Basel III is understandable given the complexities of the issue. As stated in our October 12 comment letter, ACLI supports the application of risk-based capital standards for insurers over the bank-centric capital standards from Basel III,” stated the American Council of Life Insurers (ACLI) today.

“We are pleased the agencies are taking additional time to consider the operational and implementation issues affecting insurers with banks. We encourage developing a separate rulemaking for savings and loan holding companies engaged in the business of insurance reflecting appropriate capital exemptions and requirements for insurance companies that compliments existing state regulatory requirements,” said Jim Olsen of the Property Casualty Insurers Association of America (PCI) in Des Plaines, Il, which represents many insurers who have thrifts. 

His colleague in Washington, Dave Snyder, international policy czar for PCI, noted that “this is the latest indication of the complexity of establishing and implementing global standards in financial services, even for banking, let alone insurance. The lesson here is certainly not to try imposing bank-centric rules, still not implemented successfully in the banking sector, on insurers that have a very different business model.” 

Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies, said ”NAMIC applauds the decision not to rush new regulations on capital standards, but more importantly we continue to strongly urge that these regulations be revised to reflect the differences between insurers and banks. Imposing bank-centric standards on insurance companies fails to take into account the significant differences between the two with regards to financial reporting, accounting standards, capital requirements, and other operational activities. NAMIC has repeatedly cautioned against a ‘one-size-fits-all’ approach and we are glad to see there is strong bipartisan consensus on Capitol Hill for the Fed to recognize the unique nature of the property & casualty insurance industry.” 

Insurance CFOs suggested in an Oct. 22 letter to the banking regulators that because insurance companies that have savings and loans have not been regulated by the Fed previously, new capital requirements should not be applicable until July 15.

“Such companies have never been subject to Basel requirements and this extremely short transition period is unduly burdensome and contrary to the express intent of Congress in the Collins Amendment,” the CFO letter said. An amendment to the legislation sponsored by Sen. Susan Collins, R-Maine, specifically mandates consolidated supervision of all non-banks which operate thrifts by the Fed.

Furthermore, the letter said that the proposed rules would require the implementation of GAAP accounting standards by January 2013, “which is simply infeasible for insurers not currently reporting under GAAP (Generally Accepted Accounting Principles).

“There is insufficient time for insurers to implement the systems and processes necessary to provide the data required by the proposals,” the CFO letter said.

Indeed, Northwestern Mutual Life Insurance won approval from the Federal Reserve Board to deregister as a Savings and Loan Holding Company, (SHLC) averting a collision with Fed oversight previously thought to begin at the first of the year under proposed capital rules.

The board’s approval of Northwestern’s request is notable because it appears to be the first such de-registration request approved under a section of the Dodd-Frank Act and ahead of Basel III capital rules that are slated to go into effect for insurers with thrifts Jan. 1.

The NAIC took a matter-of-fact approach in its comments on how federal agencies should provide consolidated regulation of insurance companies which operate savings and loans.

The NAIC’s comment letter responded to specific questions asked by federal regulators regarding separate accounts, the general treatment of insurance underwriting, surplus notes and policy loans. “In light of the volume of comments received and the wide range of views expressed during the comment period, the agencies do not expect that any of the proposed rules would become effective on Jan. 1, 2013. 

As members of the Basel Committee on Banking Supervision, the U.S. agencies stated that they take seriously their internationally agreed timing commitments regarding the implementation of Basel III and “are working as expeditiously as possible to complete the rulemaking process.” The agencies, led by the Federal Reserve, include the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC).

As with any rule, the agencies said they will take operational and other considerations into account when determining appropriate implementation dates and associated transition periods. 

MassMutual said it is hoping to hear word from its similar application to deregister its thrift, as well. Others have said, like Principal Financial and TIAA-Cref, that their thrift is part of their business model. Now it has more time while other insurers who do not intend to dethrift or sell their banks can try and lobby the Fed to ease some of the standards as they would apply to insurance companies.

See also:

Northwestern Mutual first to dethrift before Fed comes calling 

Senators tell Feds to back off bank-centric standards for insurers

Top execs unite to fight application of Fed’s capital standard to insurance


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