Fed conducting ‘quantitative impact study’ on insurance products as it weighs capital standards

The Federal Reserve Board is undertaking a quantitative impact study to develop information on insurance industry specific products, said Fed Gov. Daniel K. Tarullo in Senate testimony today.

But Tarullo also it would be “very welcome” if the House would follow the lead that the Senate did in enact legislation that basically allows the Fed flexibility in taking into account the distinctions between banking and insurance when setting capital standards as does the Senate bill, Capital Standards Clarification Act of 2014.

Such legislation would allow the Fed to make an assessment on the liability vulnerabilities of insurance companies – that are unique to insurance companies, Tarullo said.

View from then-new Federal Reserve building, May 1937, courtesy LOC archives

View from then-new Federal Reserve building, May 1937, courtesy LOC archives

The Fed, of course, is the prudential regulator of systemically important financial institutions (SIFIs), like Prudential Financial and AIG, and also oversees the insurance companies that still have savings and loans or thrifts.

Section 171 of the Dodd Frank Act requires the Fed to impose minimum capital standards on insurance holding companies on a consolidated basis and really gives no room, according to an opinion from the Fed general counsel, at least, for the capital rules to be narrowly tailored to insurers, who plan their businesses so assets match liabilities, not so that they have capital cushions, per se. However, he seemed to indicate it would be possible in testimony today.
“In the absence of the legislation, we’ll still be able to — to do some things because there are insurance products of — that — that do not resemble existing bank products,” Tarullo stated. “And so in some cases, we can and we’re already planning to assign different risk weights to those based upon our assessment of the actual risk associated with — with those assets.”
But — but that’s — that’s where the — the two-tracking is actually taking place.
I mentioned a little back the quantitative impact study that we’re doing, by getting more information, I think, from the insurance companies, we hope to actually find a few other areas where consistent with existing statutory requirements, we could still make some adjustments,” he explained to Sen. Mike Johanns,R-Neb., based on an unofficial transcript.

Tarullo said the Fed would continue with this approach of using two tracks of planning with respect to capital rules for insurance companies.

Tarullo testified on a panel before the Senate Banking, Housing Urban Affairs Committee on a hearing titled “Wall Street Reform: Assessing and Enhancing the Financial Regulatory System.”

His questions were in response to questions starting with Committee Chair Tim Johnson, D-South Dakota if it were important for Congress to act soon on capital standards.
The Fed did not have a comment on Tarullo’s remarks.

Tarullo let lawmakers where he thought the distinction was in banking versus insurance: “The assets are often the same. It’s — it’s really on that liability side of the balance sheet that — that you feel a difference in what a property and casualty insurer does as opposed to what a bank does and that’s what we’d like to be able to take into account,” he stated.