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House hearing on proposed capital rules

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Applying bank capital standards to insurers which operates thrifts “would be inappropriate and could have a number of negative effects for insurers,” a top official of TIAA-CREF testified before Congress on Thursday.

Instead, Gina Wilson, executive vice president and chief financial officer for the New York-based firm, suggested two alternative approaches that she said would accomplish the goals of the Federal Reserve Board, which under the Dodd-Frank Act (Dodd-Frank) now oversees financial firms which operate thrift holding companies.

“Adopting either of these alternatives would ensure insurance-centric savings and loans holding companies (SLHCs) continue to adhere to a robust set of capital standards tailored to the risks of their business model while also remaining in line with the Fed’s micro and macro prudential supervisory goals of improving the safety and the soundness of financial institutions and reducing systemic risk for the overall economy,” Wilson said.

Wilson was one of three insurance officials who testified at a hearing convened by two subcommittees of the House Financial Services Committee dealing with proposed capital rules for U.S. financial services firms.

The proposals deal with proposals by federal regulators that would apply the proposed Basel III international accounting standards to U.S. financial firms, including insurers.

Rules proposed by federal regulators in June also include provisions dealing with consolidated oversight of insurance companies which operate SLHCs.

Under the Dodd-Frank financial services reform law, insurers which operate SLHCs would be subject to consolidated regulation by the Fed.

In his testimony, Paul Smith, State Farm senior vice president and chief financial officer, said the proposed capital standards for insurers operating thrifts don’t “make sense.”

Smith also charged that, if the Fed persists in insisting upon bank-oriented rules that are inappropriate for insurance-based SLHCs, “it is hard to avoid the conclusion some have offered that the proposed rules are the latest step toward the back door elimination of the thrift charter and grandfathered unitary SLHCs.”

Kevin McCarthy, Florida insurance commissioner and president of the National Association of Insurance Commissioners, testified that federal regulators should not impose  “one-size-fits-all” financial standards on U.S. financial firms, that is, apply “bank-centric” capital rules on insurers.

He also said that solvency problems of AIG would not be prevented from recurring through the proposed rules.

“Capital requirements alone cannot enhance the safety and soundness of complex financial institutions – they are just one tool in a bigger toolbox,” McCarty said.

“For instance, the Basel III capital requirement would not have prevented the AIG meltdown,” he said.

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He also said Congress shifted consolidated regulation of SLHCs to the Fed through the Dodd-Frank after NAIC officials and leaders of the House Financial Stability Council (FSC) said the Office of Thrift Supervision’s lax consolidated regulation of AIG was what prompted AIG’s financial woes.

In his statement to the committees, Smith said, “… nothing that occurred at AIG, including the difficulties experienced in its securities lending program, warrants or justifies imposing a regulatory regime that does not match the business model and economic reality of the SLHC being regulated and that could actually weaken the SLHC.”

In her testimony, Wilson said that TIAA-CREF as an organization “is particularly concerned about the effects of the proposals on our ability to continue providing our clients with a full menu of high quality, reasonably priced financial services products.”

She also said that if the Fed persists in seeking to impose bank-centric capital standards as part of the consolidated regulation of insurers operating thrifts, that “it is important the agencies conduct a thorough cost-benefit analysis to determine the effects of the proposal on insurers and other organizations that would be subject to the enhanced capital standards.”

The first alternative by Wilson would be to follow the approach agreed to in Basel II and Basel III and deduct both the capital and assets of insurance subsidiaries.

Under this approach, regulators would use NAIC risk-based capital standards to calculate risk-assets to be included in the SLHC’s risk-based capital calculations, Wilson said.

This approach incorporates NAIC risk based capital (RBC) into the Basel-based rules “in a manner that avoids the misalignment of the incentives for managing insurance activities through a quantitative calibration of insurance capital requirements with and into the Basel requirements,” she said.

Wilson said the second alternative was proposed by the American Council of Life Insurers (ACLI) in its comment letter to the Fed on the issue. Under this approach, regulators would use NAIC RBC to calculate risk-assets to be included in the SLHC’s risk-based capital calculations.

“This approach incorporates NAIC RBC into the Basel-based rules in a manner that avoids the misalignment of the incentives for managing insurance activities through a quantitative calibration of insurance capital requirements with and into the Basel requirements,” Wilson said.

In a statement released at the hearing, ACLI officials said that RBC was specifically designed by state insurance regulators to measure the unique capital needs of insurance companies, which fundamentally differ from the capital needs of banks.

“RBC, along with other regulatory tools, has proven effective in preserving insurance company financial strength, as was highlighted by the relatively small number of insurers that became insolvent during the financial crisis,” the ACLI said in its statement.

The statement also said that the Basel III regime is bank-centric and was never intended to apply to insurance entities.” Indeed, applying Basel III standards to insurance entities would disrupt insurance markets,” the statement said. Moreover, Dodd-Frank authorizes the Fed to recognize insurance RBC as a methodology to assess capital adequacy, the ACLI said.