Senate Banking Subcommittee on Financial Institutions Hearing on Capital Regulations for Insurers
AT TUESDAY’S SENATE BANKING Subcommittee on Financial Institutions and Consumer Protection hearing, lawmakers discussed the issue of applying the same capital regulations imposed on banks to insurance companies.
Witnesses at the hearing included Sen. Susan Collins (R-Maine); Virginia Wilson, CFO of TIAA-CREF; Daniel Schwarcz, an associate professor of the University of Minnesota Law School; H. Rodgin Cohen, Senior Chairman of Sullivan & Cromwell, LLP.; Aaron Klein, Director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative; and Michael Mahaffey, Chief Risk Officer of Nationwide Insurance.
Opening Remarks
In his opening remarks, Chairman Sherrod Brown (D-Ohio) acknowledged that insurance is very different from banking and called the present issue of whether the same capital regulations imposed on banks should be used for insurance companies “very fixable.”
Brown said that applying bank capital standards to insurers is like “trying to fit a square peg into a round hole.” Capital rules, he continued, must address the specific risks of the businesses to which they are applied.
Brown noted that the Dodd-Frank Act already contains a number of provisions to prevent another financial crisis, including the designation of non-bank systemically important financial institutions (SIFIs) and the corresponding capital and leveraging rules.
In his opening remarks, Ranking Member Patrick Toomey (R-Pa.) agreed that the business models of banks and insurance companies are very different and that imposing bank-centric capital regimes on insurance companies is “completely inappropriate.”
Panel 1
Collins, who authored Section 171 of the Dodd-Frank Act (the Collins Amendment), stressed the importance of not weakening the amendment. She added that the Federal Reserve is able and should take into account the differences between insurance and other financial institutions when consolidating holding company capital under Section 171.
Collins continued that one of the most important causes of the financial crisis was that the largest financial institutions were undercapitalized, but also held assets and liabilities that could not be disentangled.
Section 171 addresses this, Collins said, by requiring large financial institutions to keep capital at least as high as community banks. She said that Section 171 allows federal regulators to take into account the distinction between banking and insurance.
Panel 2
Wilson stated that the final rules of Basel III temporarily exempted savings and loan holding companies (SLHCs), placing them under the Federal Reserve’s authority. She was concerned about the impact of final standards on how different financial services operate, explaining that applying metrics to an insurer that are designed for banks would be “inappropriate” and have negative effects on the economy and its customers. Wilson continued that under current rules, less-liquid investments are discouraged and proposed alternative methodologies to the Federal Reserve for measuring an insurer’s capital.
Schwarcz testified that the industry should not defer to state-based capital requirements. He stated that Dodd-Frank requires federal regulators to apply capital requirements to insurance SIFIs. Schwarcz said that runs on insurance companies can result in systemic risk as insurers try to dump their portfolios, causing immediate impacts on financial markets. He added that state-based capital requirements are meant to deal with consumer protection, not systemic risk.
Cohen stated that “not a single legislator or regulator has expressed the belief that…the same capital framework should be automatically imposed on two very different businesses: banks and insurers.” He continued that the Federal Reserve has authority to differentiate between banking companies and insurance companies based solely on the language in Section 171, and that Dodd-Frank requires both “robust” and “differentiated” regulation. Cohen explained that there is a difference between bank and non-bank SIFIs, including the nature of liabilities and short-term funding, and that the Federal Reserve could provide a solution without legislation.
Klein testified that Dodd-Frank envisioned regulators overcoming bank-centricity, and that insurance regulation is a test case to see if this is possible. He stated that insurance is about aggregating risk while banks mitigate risk. Klein noted that if the Federal Reserve is unwilling or unable to appropriate standards the Financial Stability Oversight Council (FSOC) could assist.
Mahaffey stated that capital strength delivers protection to customers, and said that his industry wants only to ensure that any capital standards imposed by regulators are tailored solely to the insurance business. He added that insurers subject to bank capital regime could take on additional credit risk, requiring increased capital. Mahaffey concluded that there is no “one size fits all” model for the industry and said the Federal Reserve should have the latitude to use any tool that assesses risk.
Question and Answer
Panelists agreed with Brown that the insurance business has a different model than banking, that applying Basel III requirements to insurers would have a negative impact on the safety of institutions, and that the Federal Reserve could address the differentiation without litigation.
Toomey stated that asset management is “fundamentally different” from banking, and Cohen agreed that there were problems in trying to apply bank-centric regulations to the asset management business as well. Cohen also agreed that if an insurer is not a designated SIFI, it should be subject to state regulations, as long as the insurer is not a saving and loan company.
Toomey asked Klein if he was concerned that the Financial Stability Board (FSB) might import a European/international capital approach to the American industry. Klein stated that he was concerned, but that Dodd-Frank unified the international voice for insurance.
Sen. Jack Reed (D-R.I.) asked Cohen if he was aware of any official documents from the Federal Reserve demonstrating that it has no authority over differentiation between banks and insurers, to which Cohen answered he was not.
Sen. Mike Johanns (R-Neb.) asked the panel if legislative language was necessary in order to give the Federal Reserve clear direction that they have authority when it comes to differentiation, and all panelists agreed that it was needed, with Klein adding that the FSOC also had a “role to play.”
Johanns then asked if customers would be exposed to increased risk if bank-centric rules were applied to insurance companies. The panelists answered yes, and Schwarcz added that insurance companies that are also SLHCs complicate the analysis and therefore should be regulated as such. Wilson then stated that incorrectly assigning risk to capital and requiring insurers to carry more capital than necessary is a disadvantage to capital holders.
Sen. Jon Tester (D-Mont.) concluded by asking how the application of Basel to insurance companies would impact their ability to manage assets and liabilities. Wilson answered that it would impact the financial security of investors.
For more information on this hearing and to view a webcast, please click here.
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AT TUESDAY’S SENATE BANKING Subcommittee on Financial Institutions and Consumer Protection hearing, lawmakers discussed the issue of applying the same capital regulations imposed on banks to insurance companies.
Witnesses at the hearing included Sen. Susan Collins (R-Maine); Virginia Wilson, CFO of TIAA-CREF; Daniel Schwarcz, an associate professor of the University of Minnesota Law School; H. Rodgin Cohen, Senior Chairman of Sullivan & Cromwell, LLP.; Aaron Klein, Director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative; and Michael Mahaffey, Chief Risk Officer of Nationwide Insurance.
Opening Remarks
In his opening remarks, Chairman Sherrod Brown (D-Ohio) acknowledged that insurance is very different from banking and called the present issue of whether the same capital regulations imposed on banks should be used for insurance companies “very fixable.”
Brown said that applying bank capital standards to insurers is like “trying to fit a square peg into a round hole.” Capital rules, he continued, must address the specific risks of the businesses to which they are applied.
Brown noted that the Dodd-Frank Act already contains a number of provisions to prevent another financial crisis, including the designation of non-bank systemically important financial institutions (SIFIs) and the corresponding capital and leveraging rules.
In his opening remarks, Ranking Member Patrick Toomey (R-Pa.) agreed that the business models of banks and insurance companies are very different and that imposing bank-centric capital regimes on insurance companies is “completely inappropriate.”
Panel 1
Collins, who authored Section 171 of the Dodd-Frank Act (the Collins Amendment), stressed the importance of not weakening the amendment. She added that the Federal Reserve is able and should take into account the differences between insurance and other financial institutions when consolidating holding company capital under Section 171.
Collins continued that one of the most important causes of the financial crisis was that the largest financial institutions were undercapitalized, but also held assets and liabilities that could not be disentangled.
Section 171 addresses this, Collins said, by requiring large financial institutions to keep capital at least as high as community banks. She said that Section 171 allows federal regulators to take into account the distinction between banking and insurance.
Panel 2
Wilson stated that the final rules of Basel III temporarily exempted savings and loan holding companies (SLHCs), placing them under the Federal Reserve’s authority. She was concerned about the impact of final standards on how different financial services operate, explaining that applying metrics to an insurer that are designed for banks would be “inappropriate” and have negative effects on the economy and its customers. Wilson continued that under current rules, less-liquid investments are discouraged and proposed alternative methodologies to the Federal Reserve for measuring an insurer’s capital.
Schwarcz testified that the industry should not defer to state-based capital requirements. He stated that Dodd-Frank requires federal regulators to apply capital requirements to insurance SIFIs. Schwarcz said that runs on insurance companies can result in systemic risk as insurers try to dump their portfolios, causing immediate impacts on financial markets. He added that state-based capital requirements are meant to deal with consumer protection, not systemic risk.
Cohen stated that “not a single legislator or regulator has expressed the belief that…the same capital framework should be automatically imposed on two very different businesses: banks and insurers.” He continued that the Federal Reserve has authority to differentiate between banking companies and insurance companies based solely on the language in Section 171, and that Dodd-Frank requires both “robust” and “differentiated” regulation. Cohen explained that there is a difference between bank and non-bank SIFIs, including the nature of liabilities and short-term funding, and that the Federal Reserve could provide a solution without legislation.
Klein testified that Dodd-Frank envisioned regulators overcoming bank-centricity, and that insurance regulation is a test case to see if this is possible. He stated that insurance is about aggregating risk while banks mitigate risk. Klein noted that if the Federal Reserve is unwilling or unable to appropriate standards the Financial Stability Oversight Council (FSOC) could assist.
Mahaffey stated that capital strength delivers protection to customers, and said that his industry wants only to ensure that any capital standards imposed by regulators are tailored solely to the insurance business. He added that insurers subject to bank capital regime could take on additional credit risk, requiring increased capital. Mahaffey concluded that there is no “one size fits all” model for the industry and said the Federal Reserve should have the latitude to use any tool that assesses risk.
Question and Answer
Panelists agreed with Brown that the insurance business has a different model than banking, that applying Basel III requirements to insurers would have a negative impact on the safety of institutions, and that the Federal Reserve could address the differentiation without litigation.
Toomey stated that asset management is “fundamentally different” from banking, and Cohen agreed that there were problems in trying to apply bank-centric regulations to the asset management business as well. Cohen also agreed that if an insurer is not a designated SIFI, it should be subject to state regulations, as long as the insurer is not a saving and loan company.
Toomey asked Klein if he was concerned that the Financial Stability Board (FSB) might import a European/international capital approach to the American industry. Klein stated that he was concerned, but that Dodd-Frank unified the international voice for insurance.
Sen. Jack Reed (D-R.I.) asked Cohen if he was aware of any official documents from the Federal Reserve demonstrating that it has no authority over differentiation between banks and insurers, to which Cohen answered he was not.
Sen. Mike Johanns (R-Neb.) asked the panel if legislative language was necessary in order to give the Federal Reserve clear direction that they have authority when it comes to differentiation, and all panelists agreed that it was needed, with Klein adding that the FSOC also had a “role to play.”
Johanns then asked if customers would be exposed to increased risk if bank-centric rules were applied to insurance companies. The panelists answered yes, and Schwarcz added that insurance companies that are also SLHCs complicate the analysis and therefore should be regulated as such. Wilson then stated that incorrectly assigning risk to capital and requiring insurers to carry more capital than necessary is a disadvantage to capital holders.
Sen. Jon Tester (D-Mont.) concluded by asking how the application of Basel to insurance companies would impact their ability to manage assets and liabilities. Wilson answered that it would impact the financial security of investors.
For more information on this hearing and to view a webcast, please click here.