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House Financial Services Subcommittee on Financial Institutions and Consumer Credit and Insurance, Housing and Community Opportunity Hearing

Federal Information & News Dispatch, Inc.

I. Introduction

Chairwoman Biggert, Chairwoman Capito, Ranking Members Gutierrez and Maloney, Members of the Subcommittees, thank you for providing TIAA-CREF with the opportunity to testify on this very important issue before the Subcommittee on Insurance, Housing and Community Opportunity, and the Subcommittee on Financial Institutions and Consumer Credit.

Our testimony today will focus on the regulatory capital proposals (the "Proposals") issued on June 7, 2012, by the Federal Reserve Board ("FRB") in conjunction with the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") (collectively the "Agencies"). n1 These proposed rules are designed to implement the capital reforms outlined in Basel III and the required changes to capital standards mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA").

II. Background

TIAA-CREF is a leading provider of retirement services in the academic, research, medical and cultural fields managing retirement assets on behalf of 3.7 million clients at more than 15,000 institutions nationwide. The mission of TIAA-CREF is "to aid and strengthen" the institutions we serve by providing financial products that best meet the needs of these organizations and help their employees attain financial well-being. Our retirement plans offer a range of options to help individuals and institutions meet their retirement plan administration and savings goals as well as income and wealth protection needs.

TIAA-CREF is comprised of several distinct corporate entities. Teachers Insurance and Annuity Association of America ("TIAA"), founded in 1918, is a life insurance company domiciled in the State of New York operating on a non-profit basis with net admitted general account assets of $216.8 billion. n2 TIAA is a wholly-owned subsidiary of the TIAA Board of Overseers, a special purpose New York not-for-profit corporation. The College Retirement Equities Fund ("CREF") issues variable annuities and is an investment company registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940. TIAA-CREF also sponsors a family of equity and fixed-income mutual funds.

While we are primarily engaged in the business of insurance, TIAA and the Board of Overseers hold a small thrift institution within their structure and as a result are registered as a Savings and Loan Holding Company ("SLHC"). This thrift provides TIAA-CREF with the ability to offer our clients deposit and lending products integrated with our retirement, investment management and life insurance products and enhances our ability to help them attain lifelong financial well-being.

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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. TIAA-CREF supports the ongoing financial regulatory reform efforts and believes establishing a strong set of capital rules is essential to supporting a banking organization's investment and risk management goals. It is equally important, however, to ensure the standards ultimately implemented by the Agencies fully account for the diverse business models under which different financial services organizations operate. In our analysis of the Proposals through the prism of a firm predominantly engaged in insurance, we have found the Agencies have taken a decidedly bank-centric approach. Consequently, this approach does not account for the vast differences between insurers who hold thrifts but maintain the overwhelming majority of their business in insurance products ("Insurance-centric SLHCs"), and those firms that are primarily banking entities.

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. TIAA-CREF as an organization is particularly concerned about the effects of the proposals on our ability to continue providing our clients with a full menu of high quality, reasonably priced financial services products. n3

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

We believe Congress clearly demonstrated throughout the DFA legislative process, and in the text of various provisions within DFA, its intent to allow Insurance-centric SLHCs to continue to own thrifts and offer their customers banking products and services. During the DFA legislative process, Congress affirmed the importance of the SLHC structure by maintaining the thrift charter, ensuring SLHCs would not need to become Bank Holding Companies ("BHCs"), and maintaining the Gramm-Leach-Bliley ("GLB") grandfather provisions for nonbank activities of certain SLHCs and the qualified thrift lender ("QTL") test for SLHCs. Congress went so far as to instruct "the Federal Reserve [to] take into account the regulatory accounting practices and procedures applicable to, and capital structure of, holding companies that are insurance companies (including mutuals and fraternals), or have subsidiaries that are insurance companies" in determining SLHC capital standards. n4 Indeed, as demonstrated by the Volcker Rule insurance exemption, Congress expected insurance companies to continue to own thrifts. n5 By taking these steps, Congress also confirmed that the public is entitled to more, not less, competition in the banking industry. Unfortunately, the current Proposals would make continued ownership of thrifts by insurance organizations economically prohibitive and could effectively accomplish through regulation what Congress not only did not intend to do by statute, n6 but what it specifically directed the FRB to avoid doing.

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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 National Association of Insurance Commissioners ("NAIC") insurance company risk-based capital framework utilized by insurance supervisors ("NAIC RBC") accounts for the types of risks inherent in insurance, whereas the proposed bank-centric capital standards do not. NAIC RBC is a comprehensive capital regime for insurance activities that should be viewed as equivalent to the Basel regime of bank risk-based capital in comprehensively addressing on- and off-balance sheet risk. Through calibration of required capital, NAIC RBC can be incorporated into a consolidated risk-based capital requirement for Insurance-centric SLHCs. We believe the Agencies should strongly consider the two alternatives to calibrating and incorporating NAIC RBC into the Proposals to better reflect the treatment of insurance activities.

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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 October 12, 2012. n11 Under this approach, regulators would use NAIC RBC to calculate risk-assets to be included in the SLHC's risk-based capital calculations. This approach incorporates NAIC RBC into the Basel-based rules in a manner that avoids the misalignment of the incentives for managing insurance activities through a quantitative calibration of insurance capital requirements with and into the Basel requirements. Thus, it maintains the numerators of Tier 1 common equity, Tier 1 capital and total capital, and through a calibrated conversion process calculates risk-weighted assets for the denominator and the capital ratio calculations.

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 Basel capital standards. Likewise, the activities of the thrift subsidiary would remain subject to Basel capital standards. In combination, all activities would be subject to consolidated capital requirements. A non-insurance subsidiary of a non-insurance company SLHC would be subject to the Basel risk-weighting and consolidated capital requirements under these approaches. Additionally, the consolidated leverage ratio requirement of holding 4% Tier 1 capital to average total assets would continue to set a universal capital floor for all SLHC activities, including those conducted through insurance companies.

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 Basel capital standards. Indeed, regulatory arbitrage between these two standards cannot be eliminated for the financial system as a whole unless all regulated and unregulated financial institutions are subjected to a single integrated capital standard. In this regard, we are concerned insurance companies not subject to FRB oversight will set the market price for insurance products and the additional capital and other costs imposed by FRB oversight will make insurance products offered by SLHC-affiliated insurance companies non-competitive.


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 (Aug. 30, 2012); 77 F.R. 52,888 (Aug. 30, 2012); 77 F.R. 52,978 (Aug. 30, 2012).

n2 As of September 30, 2012.

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 (April 30, 2010) - discussion of Section 616 amending HOLA to clarify the FRB's authority to issue capital regulations for SLHCs where the Committee specifically notes: It is the intent of the Committee that in issuing regulations relating to capital requirements of bank holding companies and savings and loan holding companies under this section, the Federal Reserve should take into account the regulatory accounting practices and procedures applicable to, and capital structure of, holding companies that are insurance companies (including mutuals and fraternals), or have subsidiaries that are insurance companies. " [emphasis added].

n5 Section 619(d)(1)(F) of the DFA.

n6 "Dodd-Frank amps insurers for banking exit," SNL Financial (July 11, 2012).

n7 Section 171(b)(1) of the DFA.

n8 U.S. Senate Committee on Banking, Housing and Urban Affairs, "Oversight of Basel III: Impact of Proposed Capital Rules," Statement of Michael S. Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, November 14, 2012.

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. (FDIC regulations) ("FDIC may also consider deducting investments in other subsidiaries, either on a case-by-case basis or, as with securities subsidiaries, based on the general characteristics or functional nature of the subsidiaries.").

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 (Aug. 30, 2012).

n11 See Appendix AA to the ACLI's letter.

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