Bernanke comments on Collins Amendment

“For example, it might decide that any products with the type of guarantees it disliked would be treated for capital purposes as if they were not in separate accounts, with consequent higher capital charges and with inclusion in a straight leverage ratio calculation,” he wrote in a May 2013 paper.

Fed. Gov. Daniel K. Tarullo said in testimony July 11 that 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, Tarullo 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 last week to demonstrate the limits of life insurance liquidations.   

“With that constraint, we are working as much as we can in tailoring risk-weighting for insurance products but are a little confined here,” he said, adding to lawmakers’ fears that the Fed’s hands are indeed tied for special insurance treatment.

 “I think this does impose some difficulty for our oversight,” Bernanke said today of the Collins Amendment.

Section 171 of the Dodd Frank Act, authored by Sen. Susan Collins (R-ME), requires bank holding companies, including savings and loans and systemically important nonbank financial companies to be subject to certain minimum leverage, liquidity and risk-based capital requirements. 

Collins has even written to the Fed to state her intent was not to subject insurers to strict bank capital standards if the Fed was their prudential regulator. “Industry lawyers have tried to propose a perspective on the straightforward language to allow wiggle room, but the Fed is having trouble finding much. The legal argument refers to ‘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  Arnold & Porter-led letter.

In October, a raft of Senators did make the case, and now Collins is adding to their collective voice. 

Of course, any corrective Collins Amendment legislation would have to pass, but there seems to be a fair amount of legislative interest to get things going. 

In the meantime, which is likely to be a long time, it is “crucial that the Fed not instinctively treat [insurers] simply as funny looking banks and try to force them to be more like traditional banks. The most likely place that such a mistake could be made is in the area of capital requirements, where the Fed has extensive intellectual investments in their current approach to bank capital, buttressed by agreements with their peers in other nations. Applying bank capital standards inflexibly to life insurers would run the real risk of forcing them to act more like banks, even when this would actually increase their risk,” warned Brookings Elliott, also a former J.P. Morgan investment banker and pensions expert.