Fed Has Power to Ease Rules on Insurers, Senators Say

WASHINGTON — The Federal Reserve Board has the authority to act on its own to apply different capital requirements for insurance companies than those it has already mandated for banks, according to Sen. Susan Collins.

The Maine Republican is the author of a provision of the Dodd-Frank Act that requires the Fed to set minimum capital requirements for all systemically important financial institutions. While central bank officials have suggested their hands are tied when it comes to differentiating among various types of institutions, Collins rejected that argument on Tuesday. 

Testifying before a Senate Banking subcommittee, she said "it would be improper, and not in keeping with Congress' intent, for federal regulators to supplant the prudential state-based insurance regulation with a bank-centric capital regime for insurance activities."

She said the so-called Collins amendment did not change state capital requirements for insurance companies already regulated by local regulators.

"As the author of Section 171, I do not agree that the Fed lacks this authority, and find it's this regard of my clear intent, as the author of Section 171, to be frustrating, to say the least," said Collins at the hearing.

"Since I am the author of the Collins amendment, since I am Senator Collins, I think I know what I meant."

She and others, including Sen. Sherrod Brown, D-Ohio, warned that if the Fed continued to resist pressure to make accommodations for insurance firms, they would pursue a legislative solution.

Collins introduced a bill on Monday that would clarify that the Fed is not required to include insurance companies in crafting minimum capital requirements for holding companies on a consolidated basis as long as such firms are engaged in activities regulated at the state level. Sens. Mike Johanns and Brown have crafted similar legislation to address the issue.

"If the Fed continues to disagree, I'm committed to working with both of my colleagues — Senators Collins and Johanns — to find a legislative solution," said Brown, who chairs the financial institutions and consumer protection subcommittee.

Collins said her bill was "not that far apart" and said lawmakers should work together to find consensus.

The Fed delayed addressing the issue last month, instead putting forth two options on how it could proceed. The Fed said regulators could either draft a separate rule laying out how the Collins amendment would treat nonbank financial companies designated as systemically important, or issue an order for each firm based on a particular threat the Fed may perceive.

But top officials at the Fed have repeatedly pointed to the Collins amendment as limiting the central bank's discretion to provide flexibility.

"I think it's important to note that we do operate under a constraint here," said Fed Gov. Daniel Tarullo at a Senate Banking Committee hearing on July 11. "It, that is to say that the Collins amendment, does require that generally applicable capital requirements be applied to all of the holding companies that we supervise."

Under the reform law, the Financial Stability Oversight Council has the power to name nonbank firms as systemically risky, but it is up to the Fed to decide how to supervise those institutions. To date, FSOC's designations have included two insurance powerhouses — American International Group and Prudential Financial — and others are said to be under consideration.

The Fed did not testify at Tuesday's hearing. A spokeswoman from the Federal Reserve declined to comment.