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Tarullo: Insurers really are different from banks

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In U.S. Senate Banking Committee testimony today, Federal Reserve Board Gov. Daniel K. Tarullo offered a few insights into thinking at the Federal Reserve as it develops capital rules for insurers that are under its oversight.

Tarullo reminded the committee, however, that banking regulators are constrained by the strictures of the law — the Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).

There are a number of products that insurers develop and underwrite that are not susceptible to a single capital treatment as bank capital would be, Tarullo said in response to a question from Senate Banking Chairman Tim Johnson, D-S.D. 

Tarullo raised the issue of insurance company separate accounts, where money is used to buy funds for products like variable annuities, as the key example of the difference between banks and insurers in the rationale for treating them differently. The separate account, the holy grail of life insurers, is insulated from the company’s capital demands.

Tarullo said it did not seem sensible to rush to answer capital treatment issues for insurers, so it deferred the Basel III rules in order to look more deeply into the insurance products. The Fed, along with the FDIC and the Office of the Comptroller of the Currency, were lobbied for months by insurance company executives and lawyers, prodded by the NAIC and pushed by Congress to tailor any capital rules for the insurance company structure and business plan.

However, he acknowledged, while federal banking regulators can and will take into account insurance products, they have the constraint of Section 171 of Dodd-Frank (the Collins Amendment requirement) and don’t have the ability to risk-weight the same security, whether held by a bank or by an insurer differently.

The Collins Amendment under Dodd-Frank requires the federal banking agencies to establish minimum risk-based and leverage capital requirements for bank holding companies, thrifts and nonbank companies designated as systemically important.

Tarullo said the difference in treatment for insurers may come on the liability side. With a bank, there can be a rapid liquidation but insurance is very different, he said. There is no way to accelerate funding, he noted, referencing life insurance company payouts.

“People aren’t going to die more quickly if an insurance company is in trouble,” Tarullo said.

The Fed governor, who came to office during the financial crisis in 2009, has been similarly careful in contemplating any application of global capital rules on insurers in the international arena.

 “It is important to take the time to evaluate carefully the actual systemic risk associated with these [insurance] companies, and to understand the amount of such risk relative to other financial firms, before fixing on a list of firms and surcharges,” Tarullo said back in February.

“With that constraint, we are working as much as we can in tailoring risk-weighting for insurance products but are a little confined here,” Tarullo said today.

Companies that will fall under the Basel III requirements once they are tailored to insurers, as Tarullo and the Fed says they will be, include AIG, savings and loan holding companies like State Farm, TIAA-CREF and many more insurers with thrifts. Prudential Insurance may also be included if it loses its bid to fight the nonbank systemically important financial institution (SIFI) designation by the Financial Stability Oversight Council (FSOC), and possibly MetLife as well, if it is reviewed as a nonbank SIFI candidate, now that it has shed its bank.  

U.S. Treasury officials have made clear they will continue to review other institutions for a potential designation.  

Prudential’s FSOC hearing will be held no later than early August with a decision by early October.

The SIFIs will get their own capital requirements independent of further Basel III requirements.

For the SIFIs alone, the federal banking regulators expect to finalize the remaining proposed “enhanced prudential standards” and proposed risk-based capital surcharge requirements around the end of year, Tarullo said.


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