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.
“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.