Fed takes on Dodd-Frank conflicts

Gibson also alluded to GAAP versus SAP by noting there are “some differences in regulatory accounting that we are still trying to come to grips with.”

He spoke of trying to get consistency in accounting for measurement purposes, which the two systems don’t necessarily lend themselves to. He did not value one form over the other. 

See also: ACLI concerned with US GAAP proposal

Under the Collins Amendment, the appropriate federal banking agencies are required to establish minimum leverage and risk-based capital requirements, subject to two floors, to apply to insured depository institutions, bank and thrift holding companies and nonbank SIFIs, as a memo from Davis Polk & Wardwell LLP stated shortly after the act’s passage. Section 165 is perceived as providing flexibility to create standards that result in similarly stringent risk-control standards appropriate to nonbank financial institutions.

Insurance industry CEOs, lawyers, U.S. senators, including Sen. Susan Collins, R-Maine, have argued in letters and in meetings that the Collins Amendment should not apply to insurers, citing intent. A group of lawyers from various firms, led by Arnold & Porter representing insurers, sent a team letter to the Fed recently arguing for room for interpretation in that part of the statute. 

See also: Sen. Collins says Dodd-Frank amendment should lighten up on insurers

That’s because Collins Amendment can be the whole shooting match for the imposition of bank holding company capital standards on insurers that are designated systemically important by the Financial Stability Oversight Council, and thrifts. Although, some large insurers with trusts, like Mass Mutual and Northwestern, have dethrifted, as has Prudential. The Principal Financial Company is in the process of trying to dethrift.

“This directive does not compel the use of any particular factors or methodology to determine the calculation of minimum capital of a particular type of regulated institution, nor require use of the same methodology across the board for all SLHCs. Instead, it grants the Agencies discretion to take into account whatever factors and methodologies are appropriate in relation to the assets and liabilities of a given regulated institution, including an insurance SLHC, in order to prescribe capital levels not ‘less than’ nor ‘quantitatively lower than’ the minimum bank risk based and leverage capital requirements,”  stated the Arnold & Porter letter.

See also: Bernanke backs tough thrift rules

The legal argument refers to gaps in Section 171: “The ‘gaps’ Congress left in Section 171 for the Agencies to fill in include the appropriate risk-weights, asset types, and accounting methodologies to apply in establishing minimum leverage and risk-based capital requirements for Insurance SLHCs and their insurance subsidiaries,” stated the March 20 letter.

“For example, Section 171 does not suggest that particular types of assets should be treated as high-risk in all contexts across different types of regulated institutions. It does not indicate, for example, that Congress would want the Agencies to treat long-term investments as more risky than short-term investments in the insurance context, where reality is to the contrary, as discussed above. Rather, Section 171 indicates, by leaving statutory ‘gaps’ … that the Agencies should use their experience, expertise, and access to the guidance of other regulators, coupled with all available information and analyses, to prescribe capital standards tailored to the actual risks facing the various and particular types of regulated institutions to which the standards will apply,” the letter continued.

It cited Chevron, U.S.A, Inc. v. Natural Res. Defense Council, Inc.

Insurers have argued that the bank-centric capital standards coming with Basel 3 standards will constrain their capital, which will require them to raise prices,  thus subjecting them to punitive stress tests (if not tailored to insurance companies).

“Applying the wrong capital model to insurance company assets will incent companies to change their portfolios to decrease the capital charges. As a result, those companies will necessarily modify their product offerings, or exit markets entirely, to avoid products that require them to hold long dated assets supporting long dated liabilities,” Prudential has warned.

“For consumers, this means that their access to long term insurance products that are designed to provide stability, including retirement products, will dwindle,” Prudential told the Fed in its series of arguments that a capital framework designed for banks would be adequate and appropriate for insurance companies. 

Prudential pointed out that a joint working group of the Federal Reserve System and the National Association of Insurance Commissioners reached just such a conclusion in 2002 when they recognized that “the BHC capital framework requires capital only against assets, while a significant share of capital of insurers covers risks that are not directly related to their assets.”

In its report, the working group said that the two frameworks differ fundamentally in the risks they are designed to assess, as well as in their treatments of certain risks that might appear to be common to both sectors. As a result, the effective regulatory capital requirements for assets, liabilities and various business risks for insurers are not the same as those for banks, Prudential pointed out. Moreover, the effective capital charges cannot be harmonized simply by changing the nominal capital charges on individual assets, according to the pre-crisis 2002 report cited by Pru executives.