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Senators raise concerns about proposed capital standards for SIFIs

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Members of the Senate Banking Committee and a property and casualty trade group took issue Wednesday with new international capital standards that U.S. regulators are considering for regulating systemically significant insurance (SIFI) companies as well as insurers that operate savings and loans.

Sen. Tim Johnson, D-S.D., speaking at the hearing, voiced concern about the rules regulators will use to implement international capital standards drafted by the Basel Committee on Banking Supervision. Other senators on the committee echoed Johnson’s concerns.

The June proposal to implement the so-called “Basel III” standard would require banks and SIFI non-banks such as insurance companies to maintain “loss-absorbing capital” of at least 7 percent of risk-weighted assets.

They would also establish new risk weightings for residential mortgages, commercial real estate, sovereign debt and securitizations that require more capital for riskier assets.

The regulators involved are the Federal Reserve, the Federal Deposit Insurance Corporation and the Comptroller of the Currency.

They have already agreed to delay the proposed January 1, 2013 implementation date indefinitely to provide transition rules and, in the case of insurance companies, to make the rules less “bank-centric” and more applicable to the different model of business insurance companies use.

But Johnson said, “Before moving forward with applying these rules to insurance companies, the banking agencies should take additional time to work with state-insurance regulators, the Federal Insurance Office, and the independent insurance experts on the Financial Stability Oversight Council to better understand the insurance-accounting framework and risk-based capital model currently used.

“This feedback should then be used to develop a capital framework that is more suitable for financial institutions engaged in the traditional business of insurance, and give these companies appropriate time to implement the new framework.”

In a statement released after the hearing, the Property and Casualty Insurers Association supported Johnson, saying the so-called Basel III capital standards should be scrapped.

PCI says international standard-setting bodies should focus not on more regulation “but instead identify the perceived gaps that were exposed during the financial crisis and then develop the most effective and efficient approach to bridging those gaps.”

PCI “urged the Senate Banking Committee to minimize the potentially harmful impacts of Basel III on main street businesses and the economy.”

The statement says that while PCI “applauds” the agencies for delaying implementation, there are many outstanding issues to be considered that impact the financial services industry and the larger economy.”

PCI adds that it appreciates “the careful consideration given to the depository institution holding companies with significant insurance activities.”

But the statement adds, “These developments, with regard to banking regulation, also underscore the importance of extreme caution in further regulating the insurance sector, which has a very different business model and regulatory structure from banking.”

A key banking regulator defended the proposals, while also acknowledging that federal officials are revisiting them.

Michael Gibson, director of bank supervision and regulation for the Fed, said in testimony that the proposed rules are consistent with the law the regulators are required to implement, as well as consistent with the rules other financial institutions which operate thrifts operate under.

He said the proposed rules are consistent with the Fed’s “long-standing practice of applying consolidated minimum-capital requirements to bank-holding companies, including those that control functionally regulated subsidiary insurance companies.”

“Importantly, such an approach eliminates incentives to engage in capital arbitrage by booking individual exposures in the legal entity in which they receive the most favorable capital treatment,” Gibson contended.

Gibson added, “The Fed takes these comments seriously and will consider them carefully in determining how to appropriately apply regulatory capital requirements to depository institution holding companies with significant insurance activities.” 


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