Fed Launches Study of New Capital Standards for SIFIs
October 2, 2014 by Jeff Jeffrey
WASHINGTON – The Federal Reserve Board has reached out to the large insurance holding companies it is charged with regulating in order to get their help in creating a new capital regulatory framework.
The Fed announced it has launched 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 financial reform act, the Fed said in a statement.
The Dodd-Frank Act includes a provision known as the Collins Amendment, which requires the establishment of minimum risk-based and leverage requirements for firms that are designated as systemically important financial institutions.
“The QIS is being conducted to allow the Board to better understand how to design a capital framework for insurance holding companies it supervises that is compliant with the Collins Amendment,” the Fed said in a statement. “Information collected through the QIS would allow for further exploration of areas of concern raised by commenters during the proposal stage of the revised regulatory capital framework rulemaking.”
The Fed said it has contacted the companies it supervises, asking them to participate in the study. The central bank said participation is voluntary.
To date, the Fed oversees just two insurance SIFIs: American International Group Inc. and Prudential Financial Inc. MetLife Inc. been named a preliminary SIFI, but the company is in the process of challenging the designation.
The capital requirements would also apply to savings and loan holding companies, including those with substantial insurance underwriting activity.
It is unclear whether additional companies will be invited to participate in the study. Efforts to reach the Fed for additional comment were not immediately successful.
The companies will have until Dec. 31 to submit responses to the study. They have until Oct. 10 to decide whether to participate.
The Fed’s study asks the companies to provide information about regulatory capital components and ratios; risk-weighted assets; separate account data; and state-based or foreign equivalent risk-based capital requirements.
Responses to the study will remain confidential, the Fed said.
The Fed has been working to develop new capital standards for non-bank SIFIs for over a year. That effort has been complicated by confusion over how the Collins amendment should be interpreted.
Fed officials have said the Collins Amendment limits the central bank’s ability to distinguish between banks and insurance companies when setting capital standards.
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.
But recently, the U.S. House passed a bill that would make it clear the Fed has the ability to set different capital standards for banks and insurers.
The bill passed by the House on Sept. 17 would make is clear that insurance companies that under the Fed’s supervision are not required to meet bank-centric capital standards. HR 5461, the “Insurance Capital Standards Clarification Act of 2014 was passed by the House in a procedure called “suspension of the rules” which allows bills with have strong, bipartisan support to move quickly through the chamber (Best’s News Service, Sept. 17, 2014).
The House bill followed a June vote in the Senate that saw the upper chamber unanimously pass standalone legislation that would clarify the Collins amendment.
Both bills have garnered praise from insurance industry trade organizations, which have said clarity on the Collins amendment is urgently needed.
