In testimony Wednesday before the House Committee on Financial Services, Federal Reserve Chairman Ben Bernanke appeared to acknowledge that legislation could be required to overcome one of the Wall Street Reform Act’s stickiest wickets for some insurers — the Collins Amendment.
Insurers, and now lawmakers, are expressing concern over an increase in the cost of insurance, an increase in insurers issuing more shorter-term debt to keep up, and general federal-state conflicts because of capital requirements baked into an unlikely centerpiece of the 2010 Dodd Frank Act.
Bernanke acknowledged in response to questioning that, ”we are going to do our best to tailor our consolidated supervision to insurance companies but I agree with you that the Collins Amendment does put some tough restrictions that we’re going to have…”
Rep. Dennis Ross (R-FL) interjected, “Would you agree that we would have to legislate…in order to give you…In other words?
“Yes,” Bernanke replied, cutting to the chase, in testimony playback provided by C-SPAN. (see around 2:40 mark)
“Thank you,” said Ross, who had commented that the Federal Reserve’s hands seem tied on the issue. Bernanke did not refute that.
The Fed has already deferred companies that are at least 25% insurance from the Basel III minimum standards, for now, as it struggles with tailoring “appropriate consolidated capital requirements” that reflect the insurance business model of matching assets to liabilities, and leaving alone the separate accounts. The Fed did so in its approved final rules July 2.
Bernanke said the Collins Amendment does make things more difficult because it imposes “as you say, bank style capital requirements on insurance companies.” But, he says, there are some things that the Fed can do, when asked if the future looked “not too bright” for the nonbank institutions caught under Section 171.
“There are some assets that insurance companies hold that we can differentially weight, for example,” Bernanke said.
One financial regulatory scholar at the Brookings Institution has said that the Fed could apply this risk weighting to its liking. For example, if it were to conclude that insurers were taking on too much risk with the guarantees they provide on variable products, it would be easy to discourage this through the risk-weighting procedures, stated Douglas Elliott, a fellow in economic studies at Brookings.