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Proposed Basel III cap rules worry Congress

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U.S. Senate Banking, Housing and Urban Affairs Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho, are joining the many voices in Congress protesting proposed capital standards under Basel III as applied to community banks, and for that matter, insurance companies with thrifts who will be subject to the rules. They want to make sure that they are not only being heard, but “are being proactively addressed.”

Johnson and Crapo weighed in Feb. 13 in a letter to the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp., urging the regulators to carefully consider the impact of the proposals on community banks and insurance companies, and to avoid unintended consequences.

And across the Capitol today, U.S. House Financial Services Committee members, including its leaders – in a bipartisan show of concern – raised significant issues with the Basel III capital issue in a markup of the Committee’s oversight plan to the 113th Congress.   

In their letter yesterday, the senators said that, while important to get the new capital standards in place, it is more important to get the rules right.

While the focus was first and foremost on community banks in the most recent letter, the senators said they were also concerned about the treatment of the business of insurance in the proposed rules.   

Insurers with thrifts, which number about 25, from medium-sized Midwestern plains insurers with small savings and loans to large life and property companies like Principal Financial, Prudential Financial, TIAA-Cref and State Farm are considered Savings and Loan Holding Companies (SLHCs) and will be subject to Basel III international standards for capital and liquidity by the Federal Reserve as a consolidated regulator at the holding company level.  

 Congress stated that when “issuing regulations relating to capital requirements of bank holding companies and savings and loan holding companies under this section, the Federal Reserve should take into account the regulatory accounting practices and procedures applicable to, and capital structure of, holding companies that are insurance companies (including mutuals and fraternals), or have subsidiaries that are insurance companies,” Johnson and Crapo reminded the banking regulators.

Further, Basel III was intended to be a banking, not insurance, framework and the Basel Committee itself has acknowledged that “comparisons of individual elements of the [insurance and banking] capital frameworks are potentially inappropriate and misleading,”  they wrote.

They asked that the banking agencies adhere to such congressional intent in the final rules, the Senators said.

 The  Basel Committee on Banking Supervision’s Basel III applies liquidity risk measurement, standards and monitoring to  banks and thrift holding companies, which include many insurance companies of all sizes, but many small ones, under the Fed’s purview, requires the application of enhanced capital standards, originally designated to have gone into effect Jan. 1, and which have been delayed by the Fed. 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.

On Nov. 14, 2012, the Senate Banking Committee held a hearing with officials from the banking agencies to analyze the Basel III proposals.  

At that hearing, members of the Committee on both sides of the aisle raised concerns that the Basel III proposal could negatively impact smaller depository institutions, as well as insurance companies, the housing market recovery and the overall economy.

Letters were sent by about two dozen senators, led by Sen. Sherrod Brown, D-Ohio, and Sen. Mike Johanns, R-Neb., in October to the banking agencies on these concerns. 

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“Regulatory capital rules are most effective when they are clear, well-calibrated, and work effectively in concert with other prudential requirements to ensure that there are no unintended consequences,” wrote Sens. Johnson and Crapo.   

Many industry participants had expressed concern that they will be subject to a final regulatory capital rule. Among these were major insurers with thrifts, Washington-based associations and the National Association of Insurance Commissioners (NAIC). 

The NAIC has testified before Congress that the Basel III capital standards would not have prevented the AIG meltdown were they in place. 

“Of particular concern is the proposal’s treatment of RBC [risk-based capital] as a minimum capital requirement for insurers, rather than as a regulatory trigger for intervention,” then-NAIC President and Florida Office of Insurance Regulation Commissioner Kevin McCarty testified Nov. 29, 2012, before the Subcommittees on Financial Institutions and Consumer Credit and Insurance, Housing, and Community Opportunity Committee of the Financial Services Committee.

“Given that insurers typically hold significantly more capital than the RBC trigger levels, the proposed rule suggests either a misunderstanding of insurer capital or an implication that capital above the minimum RBC levels is “excess” and therefore available to support capital deficiencies created by actions of the holding company or other affiliates. We would strongly object to policyholder dollars being used without insurance regulator approval to subsidize losses of the holding company,” McCarty stated. 

The insurance  industry and state regulatory interests have repeatedly told the federal regulators that Basel III capital standards that don’t fit insurers had no place in insurance solvency supervision. The Fed has routinely been quiet, except to delay comment periods and rule applications.

“The agencies’ decision to delay implementation of Basel III is understandable given the complexities of the issue…the 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) back in November, after the delay was announced.

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.

For community banks, one chief concern is that proposed Basel III treatment of a certain class of income, accumulated other comprehensive income, could increase volatility and make interest rate risk more difficult for small banks to manage. 

In the Republican-led House, the Financial Services Committee said this this week as part of the Committee’s oversight plan to the 113th Congress they would call upon the federal banking regulators to explain how their implementing regulations balance safety and soundness concerns against the needs of consumers and businesses for continued access to credit, and how standards adopted in Basel will be tailored to meet the unique features of the U.S. financial system.   

There is “broad consensus that many of our community financial institutions are suffering a burden because they are incapable of spreading the cost of [the capital] burden compared to their larger competitors, House Financial Services Chairman Jeb Hensarling, R-Texas, said to the committee, speaking of the bipartisan support for community banks under the thumb of many new capital standards, in particular. Ranking Minority Member Maxine Waters, D-Calif., raised the Basel III concerns first in the markup today. 

Hensarling said it was important for “community financial institutions not only to survive but to thrive.”