House Lawmakers Urge Fed Chairman to Draw Clear Distinctions Between Insurers, Banks on Capital Standards
February 23, 2015 by Jeff Jeffrey, Washington Bureau manager: jeff.jeffrey@ambest.com
WASHINGTON – Two top lawmakers on the House subcommittee with jurisdiction over the insurance industry are calling on Federal Reserve Board Chairman Janet Yellen to ensure new capital standards for systemically important financial institutions are tailored to specific industries.
Rep. Blaine Luetkemeyer, R-Mo., who chairs the House Financial Services Committee’s Subcommittee on Housing and Insurance, and Rep. Emanuel Cleaver, D-Mo., the subcommittee’s ranking Democrat, said in a Feb. 20 letter that capital standards being developed for insurance SIFIs should be based on existing regulatory measurements and standards for the industry.
“A capital regime should take into account the unique characteristics of the insurance business model, including accounting systems, insurer liabilities, valuation standards and hold-to-maturity practices,” the letter said.
Luetkemeyer and Cleaver said legislation signed into law late last year made clear the Federal Reserve Board has the authority to set standards for insurance companies that differ from those that apply to banks (Best’s News Service, Dec. 19, 2014). The legislation was designed to fix a provision in the Dodd-Frank financial reform act that Fed officials said limited their ability to set different capital standards for insurance companies and banks.
The Fed is conducting a quantitative impact study that will evaluate the potential effects of imposing new consolidated capital requirements on systemically important financial institutions. The study is designed to help the board construct a capital framework that takes into account the unique nature of the insurance business while also fulfilling the requirements of the Dodd-Frank Act.
The insurance industry has warned applying the same capital standards to banks and insurers could cause severe disruptions in the marketplace because the two businesses are fundamentally different.
There are currently three insurance companies that would be affected by the capital standards being designed by the Fed. American International Group Inc., MetLife Inc. and Prudential Financial Inc. have received final SIFI designations, though MetLife is in the process of challenging its designation in federal court.
The letter to Yellen also raises concerns about the international capital standards being developed by the International Association of Insurance Supervisors at the request of the G-20’s Financial Stability Board. While the Fed’s capital standards would only apply to companies based in the United States, the IAIS standards would apply to all internationally active insurance groups.
As part of a phase-in process for the international capital standards, the IAIS has created backstop capital requirements for companies designated as global systemically important insurers. There are currently 9 G-SIIs.
Luetkemeyer and Cleaver said the Fed should be hesitant to sign onto any international capital standards without first determining their impact on standards created in the United States.
“Consequently, we urge the board to ensure that no policy principles are agreed to internationally that would restrict the ability to implement the legislation in accord with congressional intent,” the letter said.
