Congress Bumps Bank Standards for Insurance Companies
December 12, 2014 by Arthur D. Postal
WASHINGTON – The House last night approved legislation that would clarify that the Federal Reserve Board can apply insurance-based capital standards, rather than bank-centric rules, to the insurance portion of any insurance holding company it oversees.
The bill now heads to the president’s desk “where approval is widely expected,” said John M. Nadel, an analyst at Sterne, Agee & Leach in New York, in a flash investor’s note this morning.
The legislation clarifies Sec. 171, the so-called “Collins amendment,” a provision of the Dodd-Frank Act. Congress acted after the Fed said its lawyers interpret the Collins amendment to “require” the Federal Reserve to apply bank capital rules to insurance companies it supervises.
After six months of intrigue, drama and delay, the House ultimately followed the same script as the Senate in unanimously passing Senate bill S. 2270, “the Insurance Capital Standards Clarification Act of 2014.” The Senate had passed the amendment as a stand-alone bill June 3, hours after passing legislation that would reauthorize the Terrorism Risk Insurance Act.
Nadel said the move was important because, “this as a critical step in the regulatory process as it provides the Fed ample room to maneuver in developing rules and regulations specifically tailored to the business models and risks of insurance companies, rather than applying broadly bank-centric standards.”
However, as Nadel acknowledged, “the devil is in the details.”
Steven A. Kandarian, chairman, president and CEO of MetLife, issued a statement lauding the decision.
“Congress deserves tremendous credit for passing legislation with broad bipartisan support that will give the Federal Reserve the flexibility to tailor bank-centric capital rules for the life insurance business,” he said. “The Fed now has the opportunity to write rules that will preserve competition and ensure affordable access to financial security.”
The next steps as Congress seeks to end another year of partisan bickering and get out of town is action on legislation that reauthorizes TRIA and re-establishes the National Association of Insurance Agents and Brokers (NARAB). That is likely to be followed, probably Dec. 18, by action from the Financial Stability Oversight Council (FSOC) on MetLife’s appeal of its designation as a systemically important financial institution (SIFI).
MetLife sought an appeal of the FSOC’s decision in September, and a hearing was held in November.
In his note, Nadel said that of the MetLife decision, “We expect no change in the vote (similar to the vote on Prudential Financial many months ago) and thus a formal and final designation of MetLife as a non-bank SIFI.” At the same time, Nadel said, “While there has been some speculation MetLife might avail itself of the last and somewhat drastic step of challenging the final ruling in court, we think the probability of such a decision on the part of MetLife’s executive management and board is extremely remote.”
As to TRIA and NARAB, the House yesterday passed a slightly modified version of Senate Bill 2244, passed in June. But it contained baggage unacceptable to Democrats, leaving open the possibility that legislation reauthorizing TRIA and establishing NARAB could be delayed.
The provision would prevent financial regulators from imposing margin and other requirements on farmers, ranchers and nonfinancial firms that engage in derivatives trading to protect them against setbacks in their businesses. Democrats in both the House and Senate object because it rolls back provisions in the Dodd-Frank Act (DFA) without the added scrutiny allowed through normal legislative procedures.
An added complication was added this morning when Sen. Charles Schumer, D-N.Y., who negotiated the TRIA/NARAB deal with the House, disclosed that Sen. Tom Coburn, R-Okla., plans to oppose Senate passage of the TRIA bill revised by the House yesterday and sent to the Senate. Coburn’s opposition was expected because he wants the NARAB provision “sunsetted,” that is, repealed, after two years. That would require Congress to re-pass legislation that it has debated for 14 years.
“By playing games and refusing to pass a clean extension of terrorism insurance, the House Republicans have put terrorism insurance at risk,” Schumer said in a statement. “To ensure that terrorism insurance does not lapse, the House should pass the bipartisan bill that passed the Senate with 93 votes before they leave town today.”
Democrats are also objecting to the continuing resolution needed to keep the government running because of concerns with a similar provision rolling back the DFA passed by the House yesterday. Current authorization to keep the government running ends at midnight tonight.
The Collins amendment was sponsored by Sen. Susan Collins, R-Maine, as Congress acted to strengthen insurance supervision in the wake of the catastrophic failure of American International Group. AIG’s consolidated regulator, the Office of Thrift Supervision, was cited as responsible for overseeing the holding company subsidiary of AIG that speculated in issuing credit default swaps that sent the company into turmoil. The CDS was issued through AIG’s Financial Products unit.
