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Bernanke backs tough thrift rules

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The Federal Reserve appears to be reiterating that it will use “bank-centric” standards abhorred by the insurance industry in regulating insurance companies which operate thrifts — although some industry trade groups are disputing that interpretation.

Fed chairman Ben Bernanke said the Fed must use bank-centric standards “to meet the legal requirement” imposed by the Dodd-Frank financial services reform that it apply consolidated capital requirements to savings and loan holding companies.

Bernanke’s views were made in a letter was sent to 24 senators Feb. 6 by Bernanke and obtained by the National Underwriter.

In an investors note, Ryan Schoen, et al, at Washington Analysis, said the letter “bolsters our view” that large insurers will find it prudent to exit savings and loan holding company status to avoid the strict Basel III capital rules.

Schoen, et al, interpreted the letter as saying that the Fed interprets Sec. 171 of the DFA as requiring the Fed to subject insurance companies structured as S&L holding companies to consolidated risk-based capital requirements that cover subsidiaries and non-insurance affiliates.

The letter said that Sec. 171 requires the agencies to apply consolidated minimum risk-based and leverage capital requirements for depository institution holding companies, savings and loan holding companies “that are no less than the generally applicable capital requirements that apply to insured depository institutions under the prompt corrective action framework.”

Schoen interpreted Bernanke’s letter as saying that Sec. 171 “explicitly requires that the Fed subject savings and loan holding companies – the current structure of many large insurers – to minimum leverage and risk-based capital rules. 

Bernanke included this in the letter despite concerns voiced by both members of the House and Senate that thrifts owned by insurance companies should have their consolidated regulation structured to recognize that their non-thrift operating subsidiaries are subject to oversight through statutory accounting principles, and not Generally Accepted Accounting Principles, which govern bank accounting standards.

This point was made through congressional testimony by both life and property and casualty insurers, including TIAA-CREF and State Farm, and through “numerous” comment letters to the Fed, as stated by Bernanke in his letter.

Moreover, the chief financial officers of eight insurance companies, including Prudential, TIAA-CREF and the Principal, say that the proposal, if adopted, would require all insurance organizations subject to the Fed’s supervision, “regardless of size, to meet new minimum capital requirements when the rules are promulgated.”

Other signatories include Nationwide, Mutual of Omaha and USAA, as well as two small thrifts operated by farm-based cooperatives, Country Financial and the Westfield Group.

Schoen added, “While the Fed acknowledged these concerns, it pointed to its requirement under Dodd-Frank to develop consolidated capital requirements at the holding company level, citing Section 171 of the law (the Collins Amendment) that explicitly requires that the Fed subject S&L holding companies – the current structure of many large insurers – to minimum leverage and risk-based capital rules.”

But Dave Snyder and Jim Olsen, vice presidents at the Property Casualty Insurers Association of America, argue that language at the bottom of the letter saying that the concerns voiced by the insurance industry and members of Congress will be taken into account when the Fed imposes the standards, which Schoen says will likely not be until late this year, “at the earliest.”

In these paragraphs, Bernanke says the Fed board “recognizes that these are serious concerns and will carefully consider all of the concerns raised in these comments and your letter over the course of the rulemaking.”

Bernanke also said in the letter that federal banking regulatory agencies “will also take operational and other considerations into account when determining appropriate implementation dates and associated transition periods, as with any rule.”

In their reaction to the letter, Snyder and Olsen said that PCI appreciates “the board’s recognition that there are significant differences between the business models of depository institutions and insurance companies and the commitment to seriously consider these issues.”

Snyder and Olsen added that, “We believe the consolidated regulatory capital requirements for SLHCs that are predominantly property casualty insurers should take into consideration their current regulatory capital requirements, which are appropriate for the business of writing property casualty insurance.”

They added that the application of bank holding company capital requirements to an insurance company that is considered a savings and loan holding company “would not be reflective of its operations.”

And, Olsen and Snyder said, “inappropriate and unnecessary capital requirements would ultimately harm and not help markets and consumers.”

Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies, gave a different interpretation of the letter than PCI, one more consistent with that of Schoen.

Grande said, “We appreciate Chairman Bernanke recognizing the concerns raised by NAMIC and others regarding the potential for ill-fitting bank-centric capital standards being applied to insurance-focused savings and loan holding companies.”

However, Grande said, “That acknowledgement doesn’t mean much, however, if the Federal Reserve intends to apply the same standards to all SLHCs regardless of their focus.”

Grande said that although the chairman cites the Dodd-Frank Act in his reasoning, “the members of Congress who voted to pass the act have been clear that they did not intend for insurance-related companies to be swept into banking regulations. Over the next several months we will be working with the Chairman and his fellow regulators to craft capital standards that recognize the differences between different industries and institutions.”

During the Senate Banking Committee’s hearing last week, Sen. Sherrod Brown, D-Ohio, while questioning Governor Daniel Tarullo of the Board of Governors of the Federal Reserve System, had this to say: “Second, I wanted to bring up really quickly, Mr.Chairman – and I will not end with a question. But last week, Governor, I received the Fed’s response to a letter regarding the imposition of Basel III on insurance companies. Senator Johanns and I sent, with 22 of our colleagues last year, Sens. Johnson and Crapo sent a letter yesterday to the Fed on the insurance issue. And you and other Fed officials have stated several times you believe the proposed rule adequately accommodates the business of insurance. We respectfully disagree. I will not ask for a response now, but we will work with you on that, if we could. Thank you.”

The American Council of Life Insurers declined to comment on the letter. TIAA-CREF added that it would not comment beyond its earlier testimony and comment letter.