Boston Fed gearing up for top tier regulation of Pru

Regulation will be at the holding company level. States will still oversee the insurance subsidiaries, although there is fear the Fed could require too much capital at the holding company level, ossifying the business of life and annuity insurance asset and liability management. 

If MetLife is designated a SIFI, it seems likely it will also fall under the umbrella of the Boston Fed, as it is developing expertise in life, health and asset management business supervision, and the New York Fed has its hands full with banking stability oversight. 

Because the board and the regional reserve banks work collaboratively to develop and implement supervisory programs for all supervised firms — including the insurance-focused nonbank SIFIs — Boston’s groundbreaking work in federal insurance regulation might be modeled elsewhere at some point. 

The insurance staff, according to sources, has not begun asking for data yet because it is not fully staffed and because the capital requirements for nonbank SIFIs — and also the insurers organized as savings and loan holding companies under the Fed’s purview — have not yet been formulated.

Just today, Federal Reserve Board Chair nominee Janet Yellen testified at a U.S. Senate nomination hearing that one size should not fit all when it comes to insurance, in reference to Basel III bank standards being imposed at some point on insurers. The Fed delayed those standards for businesses primarily engaged in insurance, but it believes legislation fixing that, which is pending in both cambers, may be the only long-term solution around the strictures of the minimum capital requirement statute in Dodd-Frank. 

Fed Chairman Bernanke commented in July testimony that legislation is needed to allow the Fed flexibility to deal with the so-called Collins amendment (Section 171 of Dodd-Frank), and tailor appropriate capital requirements for insurance companies.

Industry representatives have heard that the Federal Reserve Board would move slowly at the IAIS and would not be pushy or join any of the critical working committees, that they would instead leave that to FIO and NAIC representatives — at least for now. However, it probably has its sights on capital rules as that is its new financial stability bread and butter tool. 

Earlier, the Fed, according to sources, had sought to join the high-level IAIS Executive Committee, which has one FIO member and two NAIC members from the U.S., and a couple from Canada, but has no more room for North American representatives unless one stepped down. The IAIS is working on group-level capital standards for insurance companies worldwide. 

The Fed declined comment for this article, as did Prudential.