U.S. Senate Banking, Housing and Urban Affairs Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho, are joining the many voices in Congress protesting proposed capital standards under Basel III as applied to community banks, and for that matter, insurance companies with thrifts who will be subject to the rules. They want to make sure that they are not only being heard, but "are being proactively addressed."
Johnson and Crapo weighed in Feb. 13 in a letter to the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp., urging the regulators to carefully consider the impact of the proposals on community banks and insurance companies, and to avoid unintended consequences.
And across the Capitol today, U.S. House Financial Services Committee members, including its leaders – in a bipartisan show of concern – raised significant issues with the Basel III capital issue in a markup of the Committee's oversight plan to the 113th Congress.
In their letter yesterday, the senators said that, while important to get the new capital standards in place, it is more important to get the rules right.
While the focus was first and foremost on community banks in the most recent letter, the senators said they were also concerned about the treatment of the business of insurance in the proposed rules.
Insurers with thrifts, which number about 25, from medium-sized Midwestern plains insurers with small savings and loans to large life and property companies like Principal Financial, Prudential Financial, TIAA-Cref and State Farm are considered Savings and Loan Holding Companies (SLHCs) and will be subject to Basel III international standards for capital and liquidity by the Federal Reserve as a consolidated regulator at the holding company level.
Congress stated that when "issuing regulations relating to capital requirements of bank holding companies and savings and loan holding companies under this section, the Federal Reserve should take into account the regulatory accounting practices and procedures applicable to, and capital structure of, holding companies that are insurance companies (including mutuals and fraternals), or have subsidiaries that are insurance companies," Johnson and Crapo reminded the banking regulators.
Further, Basel III was intended to be a banking, not insurance, framework and the Basel Committee itself has acknowledged that "comparisons of individual elements of the [insurance and banking] capital frameworks are potentially inappropriate and misleading," they wrote.
They asked that the banking agencies adhere to such congressional intent in the final rules, the Senators said.
The Basel Committee on Banking Supervision's Basel III applies liquidity risk measurement, standards and monitoring to banks and thrift holding companies, which include many insurance companies of all sizes, but many small ones, under the Fed's purview, requires the application of enhanced capital standards, originally designated to have gone into effect Jan. 1, and which have been delayed by the Fed. Insurance companies with thrifts are to be subject to the new capital rules, as well, when they are effective.
Fed regulators, led by the Board of Governors of the Federal Reserve System, will use the capital standards to provide consolidated regulation of insurers which operate thrifts. The rules were proposed in June.
On Nov. 14, 2012, the Senate Banking Committee held a hearing with officials from the banking agencies to analyze the Basel III proposals.
At that hearing, members of the Committee on both sides of the aisle raised concerns that the Basel III proposal could negatively impact smaller depository institutions, as well as insurance companies, the housing market recovery and the overall economy.
Letters were sent by about two dozen senators, led by Sen. Sherrod Brown, D-Ohio, and Sen. Mike Johanns, R-Neb., in October to the banking agencies on these concerns.
