It seems that it is quite rare to be able to report an absolutely positive financial services regulatory development, but we can do so this week.
Last Wednesday, December 11, 2014, as Congress was rushing to finish business so that it could adjourn for the holidays, both the Senate and the House passed S. 2270, a bipartisan bill to amend the so-called “Collins Amendment” in the Dodd-Frank Act. The Collins Amendment (Section 171 of Dodd-Frank) requires the federal banking agencies to establish minimum capital requirements on a consolidated basis for depository institutions and their holding companies not less than generally applicable capital requirements.
While the activities of companies that own commercial banks are tightly proscribed by the Bank Holding Company Act, those activities in which companies that historically have owned savings banks are not similarly limited, and, thus, there exist savings and loan holding companies (“SLHCs”) engaged in a wide range of activities, including manufacturing, insurance, and even the ownership of retail grocery stores. Insurance companies, of course, are subject to stringent capital requirements imposed by state insurance regulators and are also subject to what is called Statutory Accounting Principles (“SAP”), instead of GAAP, which is generally applicable to commercial banks and their holding companies. It is said that SAP is more conservative than GAAP. Insurance companies that are publicly-held utilize GAAP to comply with requirements of the Securities and Exchange Commission, but many major insurance companies are not publicly-held, but are structured as mutual companies; thus, they do not follow GAAP, following SAP instead.
Even though the Collins Amendment merely provides that minimum capital requirements the Federal Reserve Board establishes for SLHCs must not be less than generally applicable requirements and even though it is widely believed that insurance capital requirements would not be less than bank holding company capital requirements, the Federal Reserve Board interprets the Collins Amendment as requiring it to impose bank-like capital requirements on insurance companies that are SLHCs. It originally formally proposed applying bank-like Basel III capital requirements to such SLHCs, but, in adopting the final rule, deferred doing so and recently commenced a so-called “Quantitative Impact Study” of doing so. Many insurance company SLHCs are voluntarily participating in that study.
Now, the good news.
The S. R. 2270 bill was sponsored by Senator Susan Collins, the “Collins” of “Collins Amendment” fame. Having passed both houses of Congress last week on a bipartisan basis, the bill, which now is on President Obama’s desk for signature, clarifies that the Federal Reserve Board may lawfully apply insurance capital standards to insurance company SLHCs. The bill also prohibits the Board from imposing GAAP on such insurance company SLHCs.
Thus, insurance companies that are SLHCs should continue to be subject to insurance-centric rather than bank- centric capital standards. A “sword of Damocles” that has hung over the heads of insurance company SLHCs for four and a half years has been sheathed, and common sense has returned, at least for a while to a narrow segment of financial services regulation.