Banks Rely More Heavily On BOLI

New York Life Insurance Company, New York, notes in a discussion of its own BOLI products that federal and state regulations limit the amount of Tier 1 capital that banks can devote to BOLI. One bulletin from the U.S. Office of the Comptroller of the Currency requires banks to cap exposure to insurance company default risk, including BOLI default risk, at less than 25% of their Tier 1 capital.

Despite the cap, the number of banks with more than $50 million in assets that use BOLI rose 14.5% in 2003, to 3,002, The Todd Organization says.

The percentage of banks with more than $50 million in assets that owned BOLI increased to 42.8%, from 37.8%, and the median cash value of BOLI at those banks increased to $2.2 million, from $1.7 million.

BOLI can be a great investment, but it is only as secure as the insurers backing the policies, according to Ron Roth, a senior vice president at The Todd Organization.

"In the current environment of strong demand for BOLI, as well as the expectation for higher interest rates, it is particularly important that financial institutions carefully assess the credit quality of all BOLI products," Roth says.