WASHINGTON, D.C. – U.S. Senators Sherrod Brown (D-OH), Susan Collins (R-ME), and Mike Johanns (R-NE) today introduced the bipartisan “Capital Standards Clarification Act of 2014,” which clarifies the Federal Reserve’s authority to recognize the distinctions between banking and insurance when implementing Section 171 of the Dodd-Frank Act.
“There is broad bipartisan agreement that providing traditional life, property, and casualty insurance is different from banking,” Senator Brown said. “Insurers rely on funding from customer premiums, transact long-term investments, and insure against natural disasters and life events. Traditional banking operations – while faced with a different set of challenges – conduct business distinctly different than that of an insurer. That is why the Federal Reserve must recognize the differences between the industries and ensure that institutions engaging in insurance are not held to the same capital requirements as traditional banks.”
“As I have said, and as experts have testified before the Banking Subcommittee on Financial Institutions, the Federal Reserve already has ample authority to draw distinctions between banking and insurance,” Senator Collins said. “Our bill removes any doubt about the Federal Reserve’s authority to draw this distinction and addresses the legitimate concerns raised by insurers.”
“Everyone agrees that banks and insurance companies operate differently, and everyone also agrees that applying the same standards and regulations to two different industries doesn’t make sense,” Senator Johanns said. “In the effort to eliminate the ‘too-big-to-fail’ issue resulting from the 2008 financial crisis, those lines got blurred. We need to clarify this issue before these new regulations force companies to mismatch risk profiles and drive up insurance costs for consumers.”
In March, Sen. Brown chaired a hearing of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection entitled “Finding the Right Capital Regulations for Insurers.” The hearing, at which Sen. Collins provided testimony, examined whether capital requirements under the Collins Amendment require insurance companies to adhere to the same capital standards as traditional bank holding companies (BHCs).
Section 171 of the Dodd-Frank Act, which was authored by Senator Collins, requires large financial holding companies to maintain a level of capital at least as high as that required for our community banks, equalizing their minimum capital requirements, and eliminating the incentives for banks to become “too big to fail”—the problem at the root of the 2008-2009 financial crisis. Prior to the passage of Section 171, the capital and risk standards for the largest financial institutions were more lax than those applied to smaller depository banks.
Although Section 171 allows the federal regulators to take into account the significant distinctions between banking and insurance, and while the Federal Reserve has acknowledged the important distinctions between banking and insurance, the Fed has repeatedly suggested that it lacks the authority to take those distinctions into account when implementing the consolidated capital standards required by Section 171.
Specifically, the “Capital Standards Clarification Act of 2014” would:
- Add language to Section 171 to clarify that, in establishing minimum capital requirements for holding companies on a consolidated basis, the Federal Reserve is not required to include insurers to the extent they are engaged in activities regulated as insurance at the state level;
- Provide a mechanism for the Federal Reserve, acting in consultation with the appropriate state insurance authority, to provide similar treatment for foreign insurance entities within a U.S. holding company where that entity does not itself do business in the United States; and
- Directs the Federal Reserve not to require insurers which file holding company financial statements using Statutory Accounting Principles to instead prepare their financial statements using Generally Accepting Accounting Principles.