Sen. Collins: Finding the Right Capital Regulations for Insurers

The following a statement by Senator Susan Collins, a former state insurance regulator, in testimony before the Subcommittee on Financial Institutions and Consumer Protection today on capital requirements for insurance companies. She has authored an amendment to the Dodd-Frank Act to prevent federal regulators from applying capital standards for banks to insurance entities that are already regulated by states. Insurers supported the Collins amendment at the hearing today.

Chairman Brown, Ranking Member Toomey, and members of the Committee. Thank you for convening this hearing on insurance capital standards and for inviting me to come before you today to share my views on this important topic. As a former financial regulator, I appreciate how complex it can be to develop proper capital standards. For five years, I headed Maine’s Department of Professional and Financial Regulation, overseeing the Bureau of Banking, the Bureau of Insurance, the Bureau of Consumer Credit Protection, and the Securities Division.

There are three issues I would like to touch upon this morning: first, I would like to describe why I authored the so-called “Collins Capital Standards Amendment” – section 171 of Dodd-Frank – and why it is so important that nothing be done to diminish or weaken it. Second, I want to emphasize my belief that the Federal Reserve is able to take into account – and should take into account – the differences between insurance and other financial activities when consolidating holding company capital under section 171. And third, I will comment on how the Federal Reserve’s authority on this point may be clarified, if necessary, through legislation I have recently introduced.

With regard to my first point, we all recall the circumstances we faced four years ago, as our nation was emerging from the most serious financial crisis since the Great Depression. That crisis had many causes, but among the most important was the fact that some of our nation’s largest financial institutions were dangerously undercapitalized, while at the same time, they held interconnected assets and liabilities that could not be disentangled in the midst of a crisis.

The failure of these over-leveraged financial institutions threatened to bring the American economy to its knees. As a consequence, the federal government was forced to step in to prop-up financial institutions that were considered “too big to fail.” Little has angered the American public more than these taxpayer-funded bailouts.

That is the context in which I offered my capital standards amendment, as an amendment to the Dodd – Frank bill. Section 171 is aimed at addressing the “too big to fail” problem at the root of the 2008-2009 crisis by requiring large financial holding companies to maintain a level of capital at least as high as that required for our nation’s community banks, equalizing their minimum capital requirements, and eliminating the incentive for banks to become “too big to fail.”

Incredibly, prior to the passage of Section 171, the capital and risk standards for our nation’s largest financial institutions were more lax than those that applied to smaller depository banks, even though the failure of larger institutions was much more likely to trigger the kind of cascade of economic harm that we experienced during the crisis. Section 171 gave the regulators the tools – and the direction – to fix this.

Let me turn now to my second point: that Section 171 allows the federal regulators to take into account the distinctions between banking and insurance, and the implications of those distinctions for capital adequacy. While it is essential that insurers subject to Federal Reserve Board oversight be adequately capitalized on a consolidated basis, it would be improper, and not in keeping with Congress’s intent, for federal regulators to supplant prudential state-based insurance regulation with a bank-centric capital regime for insurance activities. Indeed, nothing in Section 171 alters state capital requirements for insurance companies under state regulation.

Section 171 directs the Federal Reserve to establish minimum consolidated capital standards with reference to the FDIC’s prompt corrective action regulations. But, as I have publicly and repeatedly stressed, Section 171 does not direct the regulators to apply bank-centric capital standards to insurance entities which are already regulated by the states.

I have written to the financial regulators on more than one occasion to make this point. For example, in a November 26, 2012 letter, I stressed to financial regulators that while it is essential that insurers subject to Federal Reserve Board oversight be adequately capitalized on a consolidated basis, it was not Congress’s intent to replace state-based insurance regulation with a bank-centric capital regime. For that reason, I called upon the federal regulators to acknowledge the distinctions between banking and insurance, and to take those distinctions into account in the final rules implementing Section 171.

Mr. Chairman, I would like to place a copy of my letter into the hearing record.

While the Federal Reserve has acknowledged the important distinctions between insurance and banking, it has repeatedly suggested that it lacks authority to take those distinctions into account when implementing the consolidated capital standards required by Section 171. As I have already said, I do not agree that the Fed lacks this authority and find its disregard of my clear intent as the author of Section 171 to be frustrating, to say the least.

Which brings me to my final point: how the Federal Reserve’s authority to recognize the distinctions between insurance and banking may be clarified, if necessary, through legislation I have recently introduced.

My legislation 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 so long as the insurers are engaged in activities regulated as insurance at the state level. My legislation also provides 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.

I should point out that my legislation does not, in any way, modify or supersede any other provision of law upon which the Federal Reserve may rely to set appropriate holding company capital requirements.

In closing, I want to thank the committee for holding this hearing, and I want especially to thank you, Chairman Brown, and Senator Johanns, for the hard work you have done over many months, to try to craft language to clarify the Fed’s authority to provide the appropriate treatment for insurer capital. I believe the language I have introduced should give the Fed the clarity it needs to address the legitimate concerns raised by insurers that they not have a bank-centric capital regime for their insurance activities imposed upon them. This is an exceptionally complex area of the law, and I recognize that some may prefer a different approach than the one I have taken. I am, of course, more than willing to work with you on a carefully tailored response to address those legitimate concerns, mindful of the fact that we not take action that would diminish taxpayer protections provided by the critical reforms in Section 171.
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