Mike & Co. —
It’s all over but the shouting tonight — de facto, de jure, including superdelegates, excluding them, counting raw vote or states won — by any reasonable measure, at long last, the contest is over. It’s easy to believe, it’s hard to believe, but it is undeniably a historic moment.
From the sublime to the Federal Reserve (the segue is at the end of the update), Washington is waiting to see Fed Gov. Daniel Tarullo’s plans for applying SIFI regulations to large insurance companies, as the Fed takes another major steps toward delineating its approach to TBTF. His May 20 speech outlining upcoming rules for SIFI insurers is examined below.
Best… and congrats to Team Hillary!
The upcoming proposals will, among other things, subject the systemically important insurance companies, Prudential and AIG, to stricter capital and liquidity standards than their smaller counterparts, but they seem likely to face more lenient standards than the non-insurance SIFIs.
These rules have been long-awaited. The Fed’s mandate to regulate insurers was conferred by Dodd-Frank but it has not yet proposed rules for the industry. The Fed has limited itself to maintaining capital reserve requirements against holding companies which include an insurance-related arm.
Scope and Scale
Gov. Tarullo indicated that an advanced notice of proposed rulemaking (ANPR), would be issued “in the coming weeks.” The ANPR is expected to take a “bifurcated approach” to regulating insurers tailored to
1) insurance companies that own a federally-insured depository institution
and 2) the “systemically important” insurance companies.
Regulations for SIFI insurers:
- Assets are sorted into “risk segments” that carry different capital requirements
- Stress-testing to ensure adequate liquidity levels exist
- Increased corporate governance standards.
- New risk-management rules.
Regulations for insurance companies that own banks:
- “Aggregate capital” requirements, equal to the sum of each separate capital requirement of each subsidiary of a holding company
For other insurance companies within the Fed’s ambit, the upcoming regulations should be a simple affair. But a key objective here is to limit the chance that a holding company can shift assets from a more-risky to less-risky subsidiary in order to trick regulators and hide their vulnerability to shocks.
Milder Than Feared/Expected
While it remains to be seen how these rules will be written, the outline given by Tarullo is less strict than what the industry had feared – in fact shares of the major insurance companies rose in reaction to the speech. While AIG and Prudential will have to abide by these new regulations, MetLife will be left out, at least for the time being, though it will still need to come up with provisional compliance rules in case it loses its case on appeal. If the proposed rules really are as they seem, it may be that MetLife’s decision to challenge its designation as a non-bank SIFI was a losing gamble.
A Strategic Take on Rate Policy
Gov. Tarullo recently analyzed the balance of opinion at the Fed regarding interest rate policy, saying the hawks and doves within the FOMC break along two lines: one group wants to move rates unless something happens to force a deferral; the other doesn’t see a need to move rates unless market conditions prompt it. Tarullo sets himself firmly in the latter group, preferring that some “affirmative reason to move” exist before the next rate hike. It appears to be the prevailing view on the Board.
“The second approach I’ve been a little bit more inclined towards is to say ‘gee, you know, it is not clear what full employment is, we’re in a global environment that is not inflationary, we can perhaps get some more employment and some higher wages which will be particularly useful to those more on the margins of the labor force.”
In the Weeks Ahead
In the coming weeks, the Fed will release the insurance ANPR, opening up a 90-day comment period. The ANPR will include all the details on the proposed regulations, most importantly, insurers’ risk-segments, their relative weights, and sectoral liquidity rules will be outlined. It will also show how smaller insurers’ capital requirements will be calculated.
The rules as hinted at thus far are less strict than those imposed on banks, intentionally and for good reason. The bigger picture takeaway, though, is that if any financial institutions, including insurers, had hoped they might avoid SIFI designation altogether, that seems fanciful now, regardless of the outcome of the marquee MetLife case.