House capital standards ‘fix’ won’t fly with weighted feathers, some complain

UPDATE: Bill PASSES the House on Tuesday evening with three measures attached–collateralized loan obligation rules, mortgage transaction fees, points definitions and business risk mitigation and price stabilization requirements. More coverage in future post.
Washington, Sept. 16–
The insurance industry is bracing for possible action tonight from the U.S. House on the Dodd-Frank Act’s Collins Amendment fix or HR 5461, the “Insurance Capital Standards Clarification Act of 2014,” after fits and starts, centered on what Congresswoman Maxine Waters, D-CA, Ranking Member of the Financial Services Committee (FSC) called”three divisive measures that make substantive changes” to the 2010 law.
The measure is based on legislation introduced by Rep. Gary Miller, R-CA., and Rep. Carolyn McCarthy D-N.Y., and sponsored also by sponsored by Rep. Andy Barr, R-Ky., and would clarify the Fed’s authority under the Dodd-Frank Act’s Collins Amendment.
Another person close to the insurance industry called it a game of cat and mouse, with the House leadership adding new provisions despite hearing from the Senate the bill would be a no-go there and on the President’s desk, as well. Another merely called it “messy,” with added provisions on requirements regarding mortgage transaction fees and collateralized loan obligations.
The unadulterated “fix” provision is largely backed by the entire insurance sector involved and most of Congress who has weighed in, and the chairman of the FSC, Rep. Jeb Hensarling, R-Texas, has promised the industry a clean bill during the lame duck period after the elections, according to a source.
The legislative solution to the tightly wrought Section 171 of the Act would allow the Federal Reserve Board flexibility in applying the required minimum capital standards on its regulated entities engaged predominantly in insurance.
Otherwise, the Fed has said it basically has no choice but to require the capital standards whether for insurers or banks, even though it has acknowledged in various arenas that insurance capital is not measured the same way or for the same purposes as bank capital.
Over in the Senate, a bipartisan bill has passed, and Fed Gov. Daniel K. Tarullo has said clarifying legislation would be welcome.
“We can and should make common-sense changes to lessen the regulatory burden,” Tarullo stated at a hearing last week in the Senate. Regarding giving the Fed flexibility to tailor the capital standards it places on insurance companies, the Senate passed, by unanimous consent, a fix so that insurance companies are not subject to bank-like capital requirements contrary to their business mode, he pointed out.
Tarullo testified that it “would be very welcome if the House would follow” the Senate’s lead and enact the legislation, to give the Fed the kind of flexibility in making an assessment on the liability vulnerabilities of insurance companies that are unique to insurance companies.
Meanwhile the Fed is going to conduct a quantitative impact study to try to develop some more information on insurance industry specific products, and look at what it calls the liability vulnerabilities of insurers.
Back in the House, Waters complained that the House is “circumventing and politicizing” the process so that the fix, if packaged with other measures, will go nowhere in the Senate.
“Make no mistake – but for the Chairman’s intransigence, the insurance capital fix bill could be on the President’s desk for signature tomorrow,” Waters stated.
What the ed does determine on capital adequacy for insurers under its purview–systemically important institutions and insurers with savings & loans- is still unknown, but some analysts think it could mirror what the standard is globally as the G-20’s Financial Stability Board adopts the proposed capital requirements for global systemically important insurers (G-SIIs) from the International Association of Insurance Supervisors (IAIS).
This is a good indication of what future capital standards from the Federal Reserve will look like for domestic SIFI insurers, says a note from Washington Analysis.
“While it is likely to be modified by U.S.regulators, we view the IAIS proposal as manageable for the group, as it is tailored to insurance and similar in many ways to existing Risk Based Capital (RBC) requirements. We do not expect the Fed to propose domestic capital requirements until Q1 2015, at the earliest, with final rules unlikely until at least mid-2015,” Washington Analysis said in a note to its clients and others.
In the meantime, eyes are also on Tarullo’s fixation with insurance liabilities and how the Fed will weigh them as it develops capital standards for its stable of insurers, which include Prudential Financial, AIG and TIAA-Cref.
Under one alternative, the Fed “would be able to take account of the different liability structure of core insurance kind of activities and that would allow us to shape capital requirements at the consolidated holding company level in a way that fully took account of those differences in business model, Tarullo said in his Sept. 9 Senate testimony before the Banking, Housing and Urban Committee.

*Photo of maxine Waters courtesy of http://waters.house.gov/