Tags: Collins | bank | Dodd-Frank | insurance

Senate Banking Moves Toward Insurance Legislation

By    |   Friday, 14 March 2014 06:39 AM

The Senate Banking Committee's Subcommittee on Financial Institutions and Consumer Protection, chaired by Sherrod Brown, D-Ohio, held a hearing March 11 titled "Finding the Right Capital Regulations for Insurers."

Witnesses included Sen. Susan Collins, R-Me., and a panel representing the industry and an academic expert. The insurance industry has been bitterly complaining, as reported in several of these articles, that in implementing capital regulations under the Dodd-Frank Act, it is imposing "bank-centric" standards designed for financial institutions with relatively short-term assets and liabilities that are inappropriate for insurance companies.

Legislators have called upon the Federal Reserve to use its discretion to adjust insurance capital standards to suit the insurance model, and various witnesses representing the Fed, including most recently Chairman Janet Yellen, have said they don't think they have the authority to do this in light of the Collins amendment to Dodd-Frank, which provides that large banks must have capital requirements no less strict than those for community banks.

Therefore, it was useful that the first witness at the hearing was none other than Collins herself, who served for five years as the regulator for financial institutions in Maine. She asserted that as the author of the amendment she is the foremost authority on what Congress intended and that the Fed does indeed have the authority to tailor regulations to fit a given industry. She also offered a bill for the Committee's consideration that would do this, while Brown also has a bill that other senators are supporting. This hearing represents a step toward congressional action to take this issue away from the Fed.

The testimony at this hearing was a big cut above the run of hearings of the congressional banking committees. The star of any panel on which he sits was H. Rodgin Cohen, senior chairman of Sullivan & Cromwell and the dean of Wall Street banking lawyers. Cohen may be the Barry Manilow of banking law, and he is also an expert in framing questions so that the answer benefits his client. He stated authoritatively that the Fed does have the discretion to fashion capital regulations that would be tailored to the insurance industry, and no one disagreed.

Where one should be careful is in following this finding in the direction of other elements of the agenda of Wall Street banks. For example, Cohen referred in passing to adverse effects on the economy due to overpricing of risk. This is consistent with the posture the banking industry has adopted that it is the victim, not the perpetrator, of the ongoing crisis.

Daniel Schwarcz, associate professor at the University of Minnesota Law School, sounded an important warning that just because insurance companies should have tailored regulation does not mean that the federal regulators should defer to their state counterparts, as Cohen would have them do, because state regulation does not take account of the systemic risk posed by large insurers.

The other three witnesses all supported the industry position. The witnesses from TIAA-CREF and Nationwide also explained the utility of having depository institutions as part of their enterprises. Most significant is that Nationwide, speaking for the insurance industry, is not asking for weaker capital standards.

Two important concluding points are that nominees to the Fed are sure to be asked about this when they testify this week and that legislators have some concern that if they start to move this legislation it will lead to more demands to amend Dodd-Frank.

(Archived video and witness statements can be found here.)

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The Senate Banking Committee's Subcommittee on Financial Institutions and Consumer Protection, chaired by Sherrod Brown, D-Ohio, held a hearing March 11 titled "Finding the Right Capital Regulations for Insurers."
Friday, 14 March 2014 06:39 AM
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