The Federal Reserve Board is working on one of the most important issues for insurance companies that is or will come under its supervision reconciling, if it can, two seemingly conflicting provisions of the Dodd-Frank Act.
Michael Gibson, director, division of banking supervision and regulation, Federal Reserve Board, disclosed the Fed’s efforts in comments at an NAIC international regulatory conference Thursday in Washington.
Supervised nonbank companies may have tailored capital standards under one section of Dodd-Frank (section 165), he said, but the Collins amendment (section 171) sets a minimum floor, so it is a “bit of a challenge there to make sense of those two dissonant provisions in Dodd Frank,” Gibson said.
“We are still working through the legal arguments on that.”
See also: Dodd-Frank: A Guide
He acknowledged that the Fed lawyers are trying to work out a solution, as he noted, in his public remarks.
Gibson focused his remarks on the challenges presented by the new stable of companies now under its purview for consolidated supervision, including some big commercial firms that have thrifts, like Macy’s, Nordstrom’s and “a couple dozen insurance companies.”
“Because they have chosen to own a thrift – and are very diverse – this has been a big project for us at the Fed,” Gibson said. “So that has created some challenges in areas where we haven’t had it before.”
Moreover, thrifts, or savings and loan holding companies, are not necessarily the same level of risk as nonbank systemically important financial institutions, Gibson said, “so we are trying to treat them differently.”
For any future nonbank SIFIs, we think about systemic risk, Gibson said. “We take a macro-prudential approach and look at the system-wide risk impact of the largest companies. We intend to take that same approach in supervision of any nonbank financial institution designated by the FSOC.”
See also: FSOC to meet; still debating SIFI
For any future nonbank SIFIs, as with large bank holding companies, the Fed will be trying to reduce the chance that the firms fail, first, and also reduce the impact of any failure on the economy through solutions like resolution plans and living wills. Gibson said that the fallback options of bankruptcy and bailout solutions would not suffice.
“We want to have better options than we did in the last financial crisis,” Gibson said.
And there are differences in risk management and in oversight between BHCs and SLHCs, an we are “still in the learning phase,” Gibson said. “We are trying to figure out what we are comfortable with.”
He said the Fed has been bringing in experts in BHCs and he expects the same to happen in the area of nonbank SIFIs, as well.
With banking, a holding company should be a source of strength to support a bank or thrift. It is more challenging with an insurance company, Gibson said. State regulators say an insurance company itself should be strong. For Banks, the holding company has capital for depository subsidiaries.
“There is a potential for a conflict there—we are still trying to figure out what that means on an ongoing basis for supervision.”