Concerns that minimum leverage and risk-based capital requirements required under section 171 of the Dodd-Frank Act would be applied to insurance companies have been addressed in S. 2270, sponsored by Susan Collins (R-ME), and H.R. 4510, sponsored by Gary Miller (R-CA). Section 171, often referred to as the “Collins Amendment,” requires the Board of Governors of the Federal Reserve (Federal Reserve) to impose certain capital standards on nonbank financial institutions that are subject to its supervision. Those companies include insurance groups that have been designated as systemically important financial institutions (SIFIs) as well as insurance groups that have a bank or thrift.
There has been debate about whether the same standards must be applied to both banks and insurance companies. Section 171 does not make any distinction between the two, but section 165, which deals with the establishment of prudential standards for SIFIs, authorizes the Federal Reserve to exercise some degree of discretion in establishing those prudential standards. Section 165 authorizes the Federal Reserve to “differentiate” among companies on an “individual basis or by category” of company. The Federal Reserve may take into account a company’s “capital structure, riskiness, complexity, financial activities (including the financial activities of their subsidiaries), size and any other risk-related factors that the Board of Governors deems appropriate.” There are other provisions within Section 165 that also suggest that prudential standards of supervision should be tailored to the company or type of business, but the Federal Reserve has taken the position that it does not have such discretion with respect to the minimum leverage and risk-based capital standards in the Collins Amendment.
Under the proposed legislation, the Federal Reserve would not be required to include insurance companies and their foreign subsidiaries and affiliates when establishing the minimum leverage and risk-based capital requirements for either a depository institution holding company or for a SIFI. The insurance entities could also be excluded for purposes of determining consolidation. It does not include any actions or activities (including financial) that (1) are not regulated by a state insurance regulator or any foreign agency or authority, and (2) that are not subject to either state insurance capital requirements or capital requirements imposed by a foreign insurance regulatory authority.
The bills also address the question of whether insurance groups designated as SIFIs will be required to prepare financial statements using Generally Accepted Accounting Principles (GAAP). Under the bills, a nonbank holding company that (1) is supervised by both the Federal Reserve and a state insurance regulator, and (2) files holding company financial statements using only Statutory Accounting Principles would not be required to also prepare financial statements on a GAAP basis.