House Financial Services Subcommittee on Financial Institutions and Consumer Credit and Insurance, Housing and Community Opportunity Hearing
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Chairwoman Biggert, Chairwoman Capito, Ranking Members Gutierrez and Maloney, Members of the Subcommittees, thank you for providing
Our testimony today will focus on the regulatory capital proposals (the "Proposals") issued on
While we are primarily engaged in the business of insurance, TIAA and the
Our status as a SLHC places us under the purview of the FRB and consequently subjects us to the proposed regulatory capital regime the Agencies have set forth.
We would like to reiterate our support for and understanding of the need for appropriate capital regulations for banking organizations and emphasize that we are not seeking to exempt insurers from the Proposals. Nevertheless, applying-standards designed for banks to an insurer would be inappropriate and could have a number of negative effects for insurers, customers and the economy as a whole.
We have identified a number of our concerns with the Proposals and discuss them in detail in our comment letter, which is attached for your reference (see Appendix A). Our testimony, however, will focus on two specific items that we consider the core of our comments and the key to resolving most of the potential repercussions that would go along with imposing a bank-focused capital regime on insurance companies.
First, we will discuss congressional intent and Section 171 of the DFA, commonly known as the Collins Amendment. The FRB has taken the position that the Collins Amendment, which requires regulators to establish risk-based capital standards for banking organizations, prohibits the FRB from treating insurance assets differently from banking assets. We believe, however, that the Collins Amendment does provide banking regulators with the necessary flexibility to account for and integrate the existing insurance regulatory capital regime when developing their new model.
Second, we will outline two alternative approaches to addressing insurance activities that could be integrated into the proposed framework. Each approach utilizes the existing insurance regulatory capital standards for insurance activities. Adopting either of these alternatives would ensure Insurance-centric SLHCs continue to adhere to a robust set of capital standards tailored to the risks of their business model while also remaining in line with the FRB's micro and macro prudential supervisory goals of improving safety and soundness of financial institutions and reducing systemic risk for the overall economy.
III. Congressional Intent and the Collins Amendment
The Collins Amendment requires banking regulators to establish minimum risk-based and leverage capital requirements on a consolidated basis for insured depository institutions, depository institution holding companies and nonbank financial companies supervised by the FRB (collectively, "Covered Companies"). However, nowhere in the language of the Collins Amendment is found a directive to ignore the differences between insurance companies and banks. Rather, the language only requires that the risk-based and leverage capital requirements applicable to covered companies shall not be:
i. Less than the generally applicable risk-based capital and leverage capital requirements, which shall serve as a floor for any capital requirements that the Agencies may require ("Bank Standard"); or
ii. Quantitatively lower than the generally applicable risk-based capital and leverage capital requirements that were in effect for insured depository institutions as of the date of enactment of the DFA ("2010 Regulations") n7
We do not believe the Collins Amendment intended that the banking regulators ignore the differences between banks and insurance companies in formulating the Bank Standard nor for the standards applicable to other Covered Companies. Rather, we believe the Bank Standard outlined in Section 171(a)(2) of the Collins Amendment, which sets a floor for SLHC risk-based capital standards, allows the FRB to specifically address insurance activities as the Proposals do for policy loans, separate accounts, or, as recommended, more holistically through an insurance deduction or alternative risk asset calculation. The requirement of Section 171(b)(2) setting the "generally applicable risk-based capital requirements" floor does not require ah asset-by-asset testing of risk-weights, but instead speaks to a "numerator" of capital, a "denominator" of risk-weighted assets and a ratio of the two. The Collins Amendment does not require asset-by-asset or exposure-by-exposure minimum requirements, but instead calls for holistic floors. The second requirement that the standards not be quantitatively lower than the 2010 Regulations can be satisfied by either following the terms of the 2010 Regulations or through a holistic quantitative analysis of equivalence, which we believe would meet the "not less than" language of the statute.
The FRB apparently does not share this view of the Collins Amendment. Instead, they believe the language gives them a mandate to implement a consistent set of asset specific risk-weights for all covered companies. n8 We have expressed to the FRB, both in person and in our comment letter, our view that the language of the Collins Amendment provides adequate flexibility to interpret the statute in a way that would allow them to account for the differences between banking and insurance. We believe the Agencies should modify the Proposals to recognize that the business of insurance has different economic characteristics and serves different economic purposes than the business of banking and, accordingly, Insurance-centric SLHCs should be measured through capital standards designed to create appropriate incentives and standards for the business of insurance.
IV. Equivalency and Calibration Alternatives
We have developed two alternative solutions that would allow the FRB to implement a consolidated risk-based capital regime that utilizes the existing insurance capital standards and still meets the requirements that these standards not be "less than" or "quantitatively lower than" the bank risk-based and leverage capital requirements referenced in the Collins Amendment. We strongly support the use of either of these equivalency and calibration approaches for addressing how to incorporate insurance activities into the risk-based capital rules for Insurance-centric SLHCs. We believe the existing
A. Deduction and Calibration Alternative
The first alternative is to follow the approach agreed to in Basel II and Basel III and deduct both the capital and assets of insurance subsidiaries. The FRB could then hold these insurance subsidiaries to a prudent level of capital in excess of insurance regulatory minimums with such a standard measured in terms of NAIC RBC. This approach would be consistent with the "not quantitatively less than" requirement of the Collins Amendment, since under the 2010 Regulations, each Agency reserved the right at its discretion to deduct the capital and assets of any subsidiary from the calculation of bank level risk-based capital. n9 Likewise, the "not less than" test of the Collins Amendment would be satisfied by applying this deduction equally to both bank- and holding company-owned insurance company subsidiaries. The resulting standard would remain "on a consolidated basis" because the capital deduction would be part of the numerator calculation and the asset deduction would be part of the denominator calculation for determining a SLHCs capital ratios. Such an approach is identical to the treatment for other assets deducted from consolidated capital under the Proposals and still satisfies the "consolidated basis" standard of the Collins Amendment. n10 On a preliminary basis, we believe setting an NAIC RBC ratio of 300% as equivalent to the well-capitalized ratios required for banks is appropriate.
B. Conversion and Calibration Alternative
The second alternative was proposed by the ACLI in its comment letter to the Agencies dated
Under each of these approaches, only activities conducted under an insurance company would be subject to NAIC RBC. Any non-insurance subsidiary of a SLHC that is not also an insurance company would be subject to
C. Regulatory Arbitrage Concerns
Because we recognize the FRB's historic concerns regarding regulatory arbitrage, we think it is important to note neither of the approaches would allow businesses predominantly engaged in banking to park assets with insurance affiliates in order to lower their consolidated capital requirements. Either alternative could be tailored to apply to organizations primarily engaged in the business of insurance and then only for activities of regulated insurance companies. In addition, these approaches could include a provision allowing the Agencies the discretion to apply the general bank risk-weights to insurance company assets on a case-by-case basis in order to counter identified cases of regulatory arbitrage.
Further, we do not believe any organization not already an insurer would have an incentive to become primarily engaged in the insurance business in order to take advantage of the differing capital treatment of individual assets under NAIC RBC and the
The proposed capital standards set forth by the Agencies as drafted would have a detrimental effect on insurers' ability to offer affordable financial products, which would in rum trickle down to individuals who utilize insurance products to help them build a more secure financial future. The proposals also could have macroeconomic implications that, for example, would create disincentives for insurers to invest in asset classes that promote long-term economic growth such as long-term corporate bonds, project finance and infrastructure investments, commercial real estate loans and alternative asset classes such as timber.
Strong capital standards are vital to strengthening the overall structure of the U.S. financial system. The existing capital regime under which insurers operate has served the industry well and proved extremely effective when put to the test during the recent financial crisis. We are confident the alternative proposals we have outlined would allow the Agencies to establish a strong capital regime that also accounts for the business of insurance. We hope that as they continue to analyze the comments they have received, regulators will find our alternative approaches offer a sensible way to integrate into their proposed capital structure an alternative designed for insurers.
Thank you again for the opportunity to testify. Given the potential affect the Proposals could have on our business and our clients, we have been very active in our efforts to educate policy makers about our concerns and will continue to leverage all opportunities made available to us. We appreciate that the Subcommittees have taken an interest in this issue and have afforded us another venue in which to discuss our concerns.
n1 77 F.R. 52,792 (
n2 As of
n3 We believe, in this respect, that it is important the Agencies conduct a thorough cost-benefit analysis to determine the effects of the Proposal on insurers and other organizations that would be subject to the enhanced capital standards.
n4 Senate Report 111-176 at footnote 161 (
n5 Section 619(d)(1)(F) of the DFA.
n6 "Dodd-Frank amps insurers for banking exit," SNL Financial (
n7 Section 171(b)(1) of the DFA.
n9 See 12 C.F.R. Part 208 Appendix A, Section II.B.ii. (FRB Regulation H); 12 C.F.R. Part 3, Appendix A, Section 2(c)(7)(i) ("Deductions from total capital. The following assets are deducted from total capital: (i) Investments, both equity and debt, in unconsolidated banking and finance subsidiaries that are deemed to be capital of the subsidiary; and [t]he OCC may require deduction of investments in other subsidiaries and associated companies, on a case-by-case basis"); 12 C.F.R Part 325, Appendix A, Section II.B.3. (
n10 See [Sec.]_.22 Regulatory capital adjustments and deductions generally deducting items from Tier 1 common equity and subsection (f) treatment of assets that are deducted - "A [BANK] need not include in risk-weighted assets any asset that is deducted from regulatory capital under this section." 77 F.R. at 52,863 (
n11 See Appendix AA to the ACLI's letter.
Read this original document at: http://financialservices.house.gov/UploadedFiles/HHRG-112-BA15-BA04-WState-VWilson-20121129.pdf
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