    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                        LEGISLATIVE REVIEW OF H.R. 5059,

                THE STATE INSURANCE REGULATION PRESERVATION ACT

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                             HOUSING AND INSURANCE

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 MARCH 7, 2018

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-77

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                   _________

                       U.S. GOVERNMENT PUBLISHING OFFICE

     31-382 PDF                  WASHINGTON : 2018

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
    BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
    BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  AL GREEN, Texas
    RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
    DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
    ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
    ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
    ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
    KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
    LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
    SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
    ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
    BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
    MIA LOVE, Utah                       DENNY HECK, Washington
    FRENCH HILL, Arkansas                JUAN VARGAS, California
    TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
    LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
    DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
    BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
    ALEXANDER X. MOONEY, West Virginia
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                         Shannon McGahn, Staff Director
                     Subcommittee on Housing and Insurance

                       SEAN P. DUFFY, Wisconsin, Chairman

    DENNIS A. ROSS, Florida, Vice        EMANUEL CLEAVER, Missouri, Ranking
        Chairman                             Member
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    STEVAN PEARCE, New Mexico            MICHAEL E. CAPUANO, Massachusetts
    BILL POSEY, Florida                  WM. LACY CLAY, Missouri
    BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
    STEVE STIVERS, Ohio                  STEPHEN F. LYNCH, Massachusetts
    RANDY HULTGREN, Illinois             JOYCE BEATTY, Ohio
    KEITH J. ROTHFUS, Pennsylvania       DANIEL T. KILDEE, Michigan
    LEE M. ZELDIN, New York              JOHN K. DELANEY, Maryland
    DAVID A. TROTT, Michigan             RUBEN KIHUEN, Nevada
    THOMAS MacARTHUR, New Jersey
    TED BUDD, North Carolina
                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        March 7, 2018................................................     1
    Appendix:
        March 7, 2018................................................    33

                                   WITNESSES
                            Wednesday, March 7, 2018

    Bock, Kurt, Chief Executive Officer, COUNTRY Financial, on behalf
      of the Property Casualty Insurers Association of America.......     7
    Mahaffey, Michael, Chief Strategist and Risk Officer, Nationwide
      Mutual Insurance Company.......................................     5
    Schwarcz, Daniel, Professor of Law, University of Minnesota Law
      School.........................................................     9

                                    APPENDIX

    Prepared statements:
        Bock, Kurt...................................................    34
        Mahaffey, Michael............................................    48
        Schwarcz, Daniel.............................................    58

                  Additional Material Submitted for the Record

    Beatty, Hon. Joyce:
        Statement for the record from American Council of Life
          Insurers...................................................    74
    Rothfus, Hon. Keith:
        Statement for the record from National Association of Mutual
          Insurance Companies........................................    75
    Waters, Hon. Maxine:
        Opening statement............................................    76
    Schwarz, Daniel:
        Written responses to questions for the record submitted to
          Representative Waters......................................    77

                        LEGISLATIVE REVIEW OF H.R. 5059,

                THE STATE INSURANCE REGULATION PRESERVATION ACT

                                  ----------

                            Wednesday, March 7, 2018

                         U.S. House of Representatives,
                                        Subcommittee on Housing
                                                  and Insurance
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10:02 a.m., in
    room 2128, Rayburn House Office Building, Hon. Sean Duffy
    [chairman of the subcommittee] presiding.
        Present: Representatives Duffy, Ross, Posey, Luetkemeyer,
    Hultgren, Rothfus, Zeldin, Trott, MacArthur, Cleaver,
    Velazquez, Sherman, Beatty, and Kildee.
        Also present: Representative Green.
        Chairman Duffy. The Subcommittee on Housing and Insurance
    will come to order. Today's hearing is entitled, ``Legislative
    Review of H.R. 5059, the State Insurance Regulation
    Preservation Act.''
        Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time. Without objection, all
    members will have 5 legislative days within which to submit
    extraneous materials to the Chair for inclusion in the record.
        Without objection, members of the full committee who are
    not members of this subcommittee may participate in today's
    hearing for the purpose of making an opening statement and
    questioning the witnesses.
        The Chair now recognizes himself for 2 minutes for an
    opening statement.
        I want to thank our witnesses for their participation in
    today's hearing. We will introduce you all in a moment. We are
    here today to review the proper balance of the Federal
    Reserve's supervision of savings and loan holding companies
    (SLHCs) primarily engaged in the business of insurance.
        Under Title 1 of the Dodd-Frank Act, the Fed was given
    supervisory rulemaking authority over SLHCs in addition to its
    new authority to establish enhanced minimum leveraged capital
    and risk-based capital requirements for insurers under that
    structure.
        So here is the situation we currently find ourselves in. If
    you are an insurance company that operates in multiple States,
    you are likely organized as an insurance holding company. That
    insurance holding company and its subsidiaries are regulated by
    the State insurance commissioners. That is easy enough, right?
        The United States system of State-based insurance
    regulatory model has worked well for over 150 years. Let us say
    you are an insurance holding company and you own a thrift or a
    bank. Now you must register as an SLHC. One reason an insurer
    may want a thrift or a bank is to provide other services to
    their policyholders.
        Now, keep in mind that the thrift or the bank also has its
    own regulator, the OCC (Office of the Comptroller of the
    Currency). So these two types of entities within the SLHC are
    already regulated.
        As noted earlier under the Dodd-Frank Act, the Federal
    Reserve now has supervisory authority and access over every
    subsidiary in that SLHC, whether insurance or whether a bank.
        We are now in a system where a company primarily engaged in
    the business of insurance has three supervisors: The Fed, the
    insurance regulator, and the OCC. This is just for insurance
    companies with a thrift and/or a bank. I want to note that
    Nationwide's testimony today that they are subject to various
    regulatory bodies under their structure and that should be duly
    noted and highlighted. It seems to me we can have a better
    balance in regard to the Fed's supervision authority over an
    SLHC that primarily are engaged in the business of insurance.
        I want to thank Mr. Rothfus for bringing this bill up and
    we are having a hearing today and a more broad discussion on
    what the proper regulatory structure should be.
        With that, my time has expired.
        And I recognize the Ranking Member, the gentleman from
    Missouri, Mr. Cleaver, for 3 minutes.
        Mr. Cleaver. Thank you. Thank you, Mr. Chairman. Thank you
    for the hearing.
        Thank you for being here with us today.
        This bill before us today, H.R. 5059, introduced by
    Congressmembers Rothfus and Beatty would allow certain
    insurance savings and loan holding companies to be exempted
    from group-wide supervision by the Federal Reserve. Instead,
    they would be primarily supervised on the State level.
        And over the past few years, I, along with others on this
    subcommittee, have often expressed frustration about
    duplicative supervision and overburdensome compliance. Federal
    regulation in both the banking and insurance realms should be
    tailored appropriately.
        However, I do need to express my concern with 5059 as
    currently drafted, because I believe it could go too far in
    creating some kind of a loophole for large banks. And their
    goal would be, of course, to avoid any kind of Federal
    oversight.
        Additionally thrifts that are insured by the FDIC (Federal
    Deposit Insurance Corporation) should be subject to adequate
    Federal regulation. Though we are now nearing a decade, believe
    it or not, since the Great Recession, the lessons learned
    should remain on the forefront of our policy discussions.
        Following the 2008 financial crisis and the collapse of
    AIG, Congress determined that the Federal Reserve would have
    consolidated oversight of thrift holding and bank holding
    companies, including insurance savings and loan holding
    companies.
        The Fed now supervises insurance companies that have been
    designated as SIFIs (systemically important financial
    institutions), as well as insurance companies that own thrifts.
    Congress felt that it was important for the Federal Reserve to
    have the ability to assess the financial stability across all
    segments of large financial firms, including the parent
    companies and the subsidiaries.
        The goal is to prevent the kind of systematic failures that
    led to the economic meltdown of 2008. The Federal Reserve,
    though, primarily a bank-centric regulator, has taken steps to
    understand the insurance sector. We know this because of its
    advanced notice of proposed rulemaking for the capital
    framework for insurance companies under its purview.
        So I am hopeful that the witnesses will share their
    experiences working with the Fed on the insurance capital
    standards and elaborate on potential areas for improvement.
        As this bill has been recently introduced, I plan to use
    this hearing as a listening session. I am only hoping today
    that the witnesses can provide enough information that it will
    expand our appreciation for this legislation.
        Thank you, Mr. Chairman.
        Chairman Duffy. The gentleman yields back.
        The Chair now recognizes the Vice Chairman of this
    subcommittee, the gentleman from Florida, Mr. Ross for 1
    minute.
        Mr. Ross. Thank you, Mr. Chairman and thank you for holding
    today's hearing on this important proposal to improve oversight
    of the insurance industry by lifting costly and unnecessary
    regulations and providing our constituents with better
    financial opportunities at lower cost.
        Mr. Chairman, we talk a lot on this committee about
    unintended consequences. And that is no surprise given that our
    mandate covers one of the most complicated, interconnected
    marketplaces ever to exist, the U.S. financial system.
        Given this sprawling system, Members of Congress are
    sometimes liable to say one thing, mean another and ultimately
    effect unintended and undesired results. That seems clearly to
    be the case here throughout Dodd-Frank.
        Congress repeatedly emphasized the primacy of State
    regulation in the insurance industry. The drafters took great
    pains to applaud and preserve the State-based system of
    regulation, which has served the American people well for
    decades.
        However, as the Dodd-Frank years have worn on, it has
    become increasingly clear that in some cases this Congress has
    failed to effect its stated intent and instead created laws
    that undermine the benefits and efficacy of our State-based
    regulatory regime.
        The story of insurance companies that operate or used to
    operate thrift holding subsidiaries is a good example of an
    unintended casualty of Dodd-Frank regulation.
        Today we will learn from witnesses who have watched
    firsthand as the promise of being left alone transformed into
    new and unprecedented regulations being placed on their
    businesses. I want to thank Congressman Rothfus and
    Congresswoman Beatty for their working together on H.R. 5059 to
    help provide relief.
        And I yield back.
        Chairman Duffy. The gentleman yields back.
        The Chair now recognizes the author of 5059, the gentleman
    from Pennsylvania, Mr. Rothfus, for 2 minutes.
        Mr. Rothfus. Thank you, Mr. Chairman. I want to thank you
    for calling today's hearing on the State insurance regulation
    preservation act, H.R. 5059.
        I also want to thank my colleague, Representative Joyce
    Beatty for her hard work on this important issue.
        This is commonsense, what I call right regulation. It is a
    right regulation bill that tailors the supervision of
    insurance-focused savings and loan holding companies. As many
    of you know, Dodd-Frank brought savings and loan holding
    companies under the Federal Reserve's supervision for the first
    time.
        Despite the fact that Dodd-Frank also reaffirmed the State-
    based model of insurance regulation, a principle that many of
    us support, the law had the effect of also bringing insurance
    savings and loan holding companies under the Fed's purview.
        These are companies that are overwhelmingly engaged in the
    business of insurance, but also happen to own thrift
    subsidiaries. These insurance companies are simultaneously
    regulated by the Fed and the States.
        The lack of clarity regarding how Fed supervision of these
    insurers could complement rather than supplant State regulation
    has led to regulatory inefficiency, duplication of effort, and
    higher compliance costs. All of this cost and complexity
    eventually impacts consumers through higher prices and reduced
    access to services.
        We recently heard testimony from Rick Means, the President
    and CEO of Shelter Insurance Company. In Mr. Means' testimony
    he described how Shelter was ultimately driven to close its
    small bank since Fed supervisory requirements added more than
    $1 million to their compliance burden.
        We will hear a similar account today from Mr. Bock. Means
    wrote that, quote, ``expensive new Federal supervision did
    nothing to protect consumers and instead worked to reduce
    competition and deprive consumers of banking options.''
        Our bill addresses this issue by ensuring that insurance
    savings and loan holding companies that meet State and Federal
    capital standards are supervised on a day-to-day basis by their
    State regulators. The Fed will serve as a backstop regulator,
    and it will be empowered to step in and take a more hands on
    role if one of these companies does not satisfy its capital
    standards.
        Meanwhile, the Office of the Comptroller of the Currency
    will retain its authority over thrift subsidiaries. Again, this
    is a commonsense, targeted, right regulation that will provide
    greater regulatory clarity and efficiency and reduce
    unnecessary compliance burden.
        I thank the Chairman, and I yield back.
        Chairman Duffy. The gentleman yields back.
        We now recognize our panel of three witnesses. Our first
    witness today is Mr. Michael Mahaffey, Chief Strategist and
    Risk Officer for Nationwide Mutual Insurance Company. Welcome.
        Our third witness is back for, I believe, a second round
    and one of our frequent presenters, Mr. Daniel Schwarcz,
    Professor at the University of Minnesota Law School. Welcome.
        And for the introduction of Mr. Bock, an Illinois native, I
    want to look to the gentleman from Illinois, Mr. Hultgren, for
    that introduction.
        Mr. Hultgren. Thanks, Chairman. It is a pleasure to welcome
    Kurt Bock, CEO of COUNTRY Financial. He has served as CEO for
    the last 6, 7 years, oversees about 5,000 employees that they
    have there. They meet the needs, financial needs and insurance
    needs of almost a million customers.
        Also grateful for his service; served in our Air Force for
    28 years, was a colonel, I believe. Is that correct? So Colonel
    Bock now is CEO of COUNTRY. He also is Chairman of the Property
    Casualty Insurance Association of America Board of Governors.
    So grateful for his work there.
        And also was appointed back in November 2015 to the Federal
    Advisory Committee on Insurance by the Director of the Federal
    Insurance Office.
        So Illinois has some challenges. One thing we do well in
    Illinois is insurance, and so I am so grateful for COUNTRY and
    other companies that are in Illinois as well. But we just want
    to welcome Mr. Bock, Colonel Bock, being with us here today.
        And thank you, Chairman. I yield back.
        Chairman Duffy. Illinois' challenges, including football.
        All Right. Our witnesses in a moment will now be recognized
    for 5 minutes to give an oral presentation of their written
    testimony. Without objection, the witnesses' written statements
    will be made part of the record following their oral remarks.
        Once the witnesses have finished presenting their testimony
    each member of the subcommittee will have 5 minutes within
    which to ask the panel questions.
        On your table you will note there are three lights. The
    green means you are a go. The yellow light means that you have
    1 minute remaining. And if the light turns red, that would mean
    that the time is up. The microphones are sensitive to please
    make sure you are speaking directly into them.
        And with that, we will now recognize Mr. Mahaffey for 5
    minutes.

                      STATEMENT OF MICHAEL MAHAFFEY

        Mr. Mahaffey. Thank you. Chairman Duffy, Ranking Member
    Cleaver, and members of the subcommittee, thank you for the
    opportunity to appear before you today.
        My name is Michael Mahaffey, and I am the Chief Strategy
    and Risk Officer for Nationwide Mutual Insurance Company. I am
    testifying on behalf of Nationwide, but also represent a
    diverse group of insurers that, like Nationwide, are subject to
    both State insurance holding company supervision and Federal
    Reserve holding company supervision due to their ownership of a
    thrift.
        I am here today to testify in support of H.R. 5059 and
    would like to thank the bills' sponsors, Congressman Rothfus
    and Congresswoman Beatty.
        As Nationwide's Chief Strategy and Risk Officer, I am
    responsible for our business strategy and enterprise risk
    management program. In these capacities I have had the
    opportunity to engage directly with the Ohio Department of
    Insurance and with the Federal Reserve examination teams on
    numerous occasions.
        Therefore, I believe I can offer a helpful perspective on
    the inefficiencies in the supervisory environment faced by
    Nationwide and other insurance SLHCs and how H.R. 5059 can
    maximize supervisory efficiency while avoiding gaps in
    supervision. Nationwide is an A+ rated diversified financial
    services company offering property and casualty insurance,
    financial services, and banking products and services. We are
    highly regulated across all aspects of our business. Nationwide
    is registered as an insurance holding company system in the
    various systems where it is domiciled insurance companies with
    the Ohio Department of Insurance serving as the lead State
    supervisor of the holding company system.
        By virtue of its ownership of Nationwide Bank, a thrift
    institution representing less than 3 percent of Nationwide's
    total assets, Nationwide is also registered as an SLHC and
    subject to an additional layer of holding company supervision
    by the Federal Reserve.
        We support appropriate levels of supervision and
    regulation. We are not seeking to eliminate the role of the
    Federal Reserve in ensuring our safety and soundness.
        Rather, we seek to ensure that our supervisory regime: One,
    provides an appropriate balance between the roles of the
    Federal Reserve and the State insurance supervisors; two, is
    proportional and tailored to the risk faced by organization;
    and three, allows us to focus on the risks that are most
    material to our organization given our business composition. We
    believe that H.R. 5059 achieves these goals.
        Despite significant supervisory and regulatory cost,
    Nationwide purposefully opted to continue to offer
    competitively priced, reliable banking products. These products
    and services create additional value for the members we serve.
        As an example, Nationwide Bank has created innovative
    solutions to deliver immediate access to insurance funds for
    our members in the wake of natural catastrophes. Whether
    utilizing the prepaid claims cards in the aftermath of the
    Joplin tornadoes or supplying emergency debit cards to
    customers in Northern California wildfires, who had literally
    lost everything.
        These solutions provide access to critical funds precisely
    when they are needed most. In the 7 years that we have been
    subject to Federal Reserve supervision, we have found Federal
    Reserve examiners to be dedicated public servants who
    consistently strive to work collaboratively and thoughtfully
    with us.
        We also appreciate the insurance policy team led by Tom
    Sullivan at the Federal Reserve Board in Washington, which has
    provided invaluable expertise on insurance and has been equally
    open and collaborative in working with us.
        However, despite the sincere efforts of these professionals
    at the Federal Reserve, our current supervisory environment
    remains unnecessarily inefficient in ways that Congress did not
    intend. As my written testimony highlights in greater detail,
    there are several examples of instances where Federal Reserve
    holding company supervision has produced unintentional
    inefficiencies and redundancy vis-a-vis State supervision.
        These include overlapping statutory responsibility to
    examine the operating and financial conditions of the group,
    duplicative examinations, inconsistent supervisory regimes or
    regulatory standards, overlapping authority to require
    corrective actions, to name a few.
        Due to the intensive nature of Federal Reserve supervision,
    Nationwide's Board of Directors and senior management spend a
    substantial amount of time and resources reviewing, analyzing,
    and implementing Federal Reserve supervisory guidance that was
    designed by bank regulators for banks to manage bank-centric
    risks.
        Further, we devote a substantial amount of time and
    resources responding to examinations and information requests
    related to bank-centric supervisory guidance.
        These resources would be more appropriately devoted to our
    most material and relevant insurance risks, which are directly
    within the purview of the State insurance departments.
        I would like to now turn to our support for H.R. 5059 and
    the appropriateness of this legislative solution. We do not
    believe that in passing Dodd-Frank, Congress intended to force
    insurance companies to sell their thrifts.
        We also do not believe that Dodd-Frank intended the Federal
    Reserve to place the same supervisory demands on a $230 billion
    insurance company with a $7 billion thrift which is already
    subject to extensive State insurance holding company
    supervision, as on a $230 billion bank holding company
    predominantly engaged in banking and other financial
    activities.
        We greatly appreciate Congress' longstanding commitment to
    the State system of insurance regulation and the thoughtful,
    bipartisan approach this body has taken on the issues in the
    past, including the passage of the 2014 Insurance Capital
    Standards Clarification Act.
        H.R. 5059 will work in concert with that act by, one,
    allowing the Federal Reserve to monitor solvency at the
    insurance SLHCs by imposing capital standards, two, preserving
    the Federal Reserve's ability to examine puerile non-regulated
    entities and to monitor and address those risks through its
    relationships with primary prudential regulators of those
    insurance holding companies, and three, provide the Federal
    Reserve the ability to step in if reasonably necessary using
    its emergency authority.
        Mr. Chairman, in closing, I would like to add that it is
    critically important to Nationwide and I know to all members of
    this subcommittee that the legislation address regulatory
    inefficiencies without creating any regulatory gaps or
    inequities.
        We believe that a bipartisan solution to this issue is
    critical. And while we support the legislation in its current
    form we also support necessary changes to improve the bill and
    increase its bipartisan support.
        We look forward to providing additional input as the
    process unfolds, and we greatly appreciate the opportunity to
    testify today.
        [The prepared statement of Mr. Mahaffey can be found on
    page 48 of the Appendix]
        Chairman Duffy. Thank you, Mr. Mahaffey.
        Mr. Bock, you are now recognized for 5 minutes for your
    oral presentation.

                         STATEMENT OF KURT BOCK

        Mr. Bock. Thank you. Mr. Chairman, Ranking Member and
    members of the subcommittee, my name is Kurt Bock the Chief
    Executive Officer of COUNTRY Financial. I appreciate the
    opportunity to testify on behalf of the Property Casualty
    Insurers (PCI) Association of America, which represents 1,000
    insurers and reinsurers providing insurance products to
    families, communities, and businesses around the world.
        COUNTRY is a mid-sized financial company from America's
    heartland that was formed by a group of farmers in 1925 and
    provides home, auto, business, and life insurance, as well as
    retirement investments and education funding for our customers.
        COUNTRY Financial has always had an A.M. Best rating of A+
    or superior. Most importantly, our top priority is always our
    customers. And we assess any regulatory changes or proposals
    through their lens.
        State-based insurance regulation of COUNTRY effectively
    oversees all aspects of our insurance operations. To support
    our customers' needs for trust, service, and investment
    management, COUNTRY maintains a very small thrift.
        After the Dodd-Frank Act, the Federal Reserve Board assumed
    supervision of our entire insurance holding company based on
    our very small depository institution that accounted for only
    0.2 percent of COUNTRY's total assets and had no transactional
    deposits or loans.
        While the Federal Reserve staff are exceptionally
    professional, the endless discovery questionnaires and onsite
    visits to oversee every corner of our operations consumed
    roughly 25 percent of our risk management, internal audit, and
    compliance staff time. COUNTRY had to engage both inside and
    outside counsel in responding to requests for information that
    added layers and layers of documentation reporting beyond our
    current SEC (U.S. Securities and Exchange Commission), FINRA
    (Financial Industry Regulatory Authority), OCC, and State
    regulatory requirements.
        The additional layers of regulatory oversight threatened to
    significantly distract us from serving our customers, even
    though there were no material changes that were required or
    made as a result of what was an enormous amount of red tape
    with no real rationale or benefit to our customers or the
    broader company.
        We requested deregistration of our savings and loan holding
    company in 2015 and were released from the Federal Reserve's
    supervision in 2017. Even though COUNTRY is no longer subject
    to Federal Reserve Board oversight, we hope that sharing our
    experience will help Congress right-size Federal involvement in
    insurance.
        Numerous PCI members have had to divest their small
    depository institutions that were serving customers and adding
    synergies to their operations because of increased supervisory
    cost. Quite simply, the juice was not worth the squeeze, and
    that clearly was not the intent of Dodd-Frank.
        Does Congress really want the Federal Reserve to allocate
    their resources duplicating State oversight of Main Street
    insurance companies, particularly when the track record of
    insurance solvency in the last several financial crises
    compares very favorably with Federal oversight.
        Last year, consumers suffered perhaps the worst insured
    loss year in U.S. history including record hurricanes,
    wildfires, earthquakes, and tornadoes, but the insurance
    industry rose to the challenge. Customer satisfaction with
    homeowners insurers has never been higher. And the industry's
    financial strength is similarly at record highs.
        As insurers we faced our 1-in-100-year crisis and our
    companies and regulatory system emerged with record consumer
    satisfaction and solvency. We fully respect the integrity of
    the Federal Reserve in carrying out its new responsibilities,
    but we do not believe Congress truly intended to create an
    additional layer of intensive Federal insurance supervision.
        After years of assurances that that Federal oversight will
    be proportional, it is clear that further legislative direction
    is required.
        The legislation by Representatives Rothfus and Beatty
    clarifies the Congressional intent of Dodd-Frank and the
    growing recognition that Federal Reserve oversight of insurance
    holding companies needs to be coordinated with State insurance
    regulators and appropriately tailored and limited to the Fed's
    unique mission.
        Just as COUNTRY decided that the excessive resource cost of
    Federal oversight did not support our core mission of serving
    our customers, Congress might recognize that requiring the Fed
    to be a duplicative regulator for insurers does not well-serve
    its core mission.
        H.R. 5059 would go far in eliminating this unproductive
    duplication and would assure robust and coordinated State and
    Federal regulation that is both effective and efficient.
    Accordingly, PCI and COUNTRY look forward to working with
    policymakers to finalize and enact H.R. 5059.
        I thank you for the opportunity to testify today.
        [The prepared statement of Mr. Bock can be found on page 34
    of the Appendix]
        Chairman Duffy. Thank you, Mr. Bock.
        The Chair now recognizes Professor Schwarcz for 5 minutes.

                      STATEMENT OF DANIEL SCHWARCZ

        Mr. Schwarcz. Thank you very much, Chairman Duffy, Ranking
    Member Cleaver, and members of the subcommittee. I am very
    sympathetic to the goals of this bill, which are indeed to
    reduce regulatory compliance burdens on various firms that are
    already well-regulated by the States.
        But I also have a number of substantial concerns about this
    bill that I want to air in my brief oral testimony today and
    that I also go into at some length in my written testimony.
        The first point I want to make in my oral testimony is that
    the bill actually goes way further than many of the statements
    that have been made today. And that is because of how it is
    drafted.
        The bill creates a new type of financial institution that
    hasn't been recognized before in regulatory and statutory
    language and that is an insurance savings and loans holding
    company. It then subjects that company to reduced regulation
    compared to other savings and loans holding companies.
        This inevitably creates the risk of regulatory arbitrage or
    as one of you mentioned earlier, unintended consequences. And I
    want to give you an example of that right now to start off my
    testimony.
        Under the bill's language, any bank that wants to avoid
    Federal scrutiny could simply make its top holding company an
    insurance company. Get a license for that company to write
    insurance. Once it did so, under the bill's definition, it
    would be classified as an insurance savings and loan holding
    company because its top tier holding company would, in fact, be
    an insurance underwriting company under the language of the
    bill.
        That is clearly not what is intended by the bill, but it is
    a result of how the bill is currently drafted. So I would
    suggest, one, that this should be clarified in the bills'
    language, but two, that this points to a broader concern with
    the bill that by creating a new type of regulatory entity that
    is subject to less stringent regulation than other types of
    similarly situated regulatory entities, it inevitably creates
    the risk of regulatory arbitrage.
        Second, I want to clarify the statements that have been
    made that Dodd-Frank somehow radically changed the regulation
    that insurance savings and loans holding companies face. In
    fact, while it did transfer supervisory authority to the Fed,
    it was the case before 2008, well before 2008, that any entity
    that owned a bank was subject to Federal supervision.
        And the group level supervisor for entities, including
    insurance companies that held depository institutions, was the
    OTS (Office of Thrift Supervision). It is ironic now that this
    bill seeks to eliminate Federal oversight over such entities,
    given that a big part, probably the primary reason why AIG
    failed, was OTS' failure to exercise its effective group level
    oversight.
        That is why Dodd-Frank transferred supervisory authority
    over savings and loan holding companies, all savings and loans
    holding companies, to the Fed in a way that wouldn't result in
    regulatory arbitrage. Dodd-Frank created a simple and easy
    rule.
        If you own a bank you will be regulated at the Federal
    level at the holding company level and there is no choice about
    who your regulator will be. This bill undermines that.
        Third, there is a reason why until this point for decades
    we have always maintained that if you own a bank, if you are a
    financial conglomerate that owns any FDIC-insured institution
    you must be regulated at the holding company level.
        That is because if you own an FDIC-insured institution, you
    have a unique privilege, a Federal guarantee of your creditors.
    That creates unique risks to American taxpayers and to the
    Federal Government. And a core goal of banking regulation is to
    manage those risks. Banking regulation accomplishes that by
    regulating both the bank and the holding company.
        If you now eliminate Federal oversight of any financial
    conglomerate that owns a bank, you create the risk that we are
    now not just going to have small FDIC-insured institutions and
    savings and loans holding companies, but that we are going to
    expose the Insured Depository Fund to heavy losses that are
    actually a result of its non-bank affiliates.
        The final point I want to make is that while it is the case
    that State insurance oversight is generally strong with respect
    to the individual entity, the core goal of State insurance
    regulatory oversight is not group regulation. In fact,
    insurance group regulation really, for all intents and
    purposes, didn't even exist until 2008.
        So the notion that we are relying on some tried and true
    regulatory system at the insurance level at the holding company
    level is simply false. It is a new regime that has yet to be
    tested. And I think it is a mistake to eliminate Federal
    oversight on the assumption that it will work well in the next
    crisis.
        [The prepared statement of Mr. Schwarcz can be found on
    page 58 of the Appendix]
        Chairman Duffy. The gentleman yields back.
        A little out of order, but one of the authors of this bill,
    Mrs. Beatty from Ohio, had a little traffic on the way in, so I
    want to recognize her for 2 minutes for her opening statement.
        Mrs. Beatty. Thank you, Mr. Chairman and Ranking Member,
    but let me first thank you for allowing me this opportunity.
    And my delayed arrival was because, again, a bipartisan event
    was being held. Congresswoman Kathy McMorris Rodgers joined
    other leaders as we saluted leader Pelosi for her gavel and
    suit going into the Smithsonian this morning
        But let me say to our witnesses, thank you for being here.
        And to my colleague Mr. Rothfus, who I had the pleasure to
    work with on a bipartisan basis to advance this bill through
    the Congress.
        It is always a pleasantry to welcome our witnesses, but
    today I take special honor in having someone here from my
    district, and thank you, Mr. Mahaffey for being here.
        In my opinion, this bill simply seeks to right side the
    excessive burden of regulation placed on insurance savings and
    loan holding companies compared--and this is really important--
    compared to the risk they pose to financial stability.
        None of these companies has ever been designated by the
    Financial Stability Oversight Council (FSOC) as posing a risk
    to the financial stability of the United States' economy, yet
    they face similar regulations by the Federal Government as if
    they were, all because of the way they are structured.
        There is no reason, in my opinion, why a smaller insurance
    company like Ohio-based Westfield Insurance Group should face
    more regulations than some of the larger insurance companies in
    the country due to the fact that they have a small depository
    institution. For me, it just makes no sense.
        Now, this is a bipartisan bill and I am reasonable so I
    look forward to hearing from the witnesses on their experiences
    as insurance savings and loan companies and ways to improve the
    bill.
        Thank you, and I yield back.
        Chairman Duffy. The gentlelady yields back.
        The Chair now recognizes himself for 5 minutes.
        I just want to be clear on a couple of things. There has
    been in this committee a lot of debate about Dodd-Frank at
    different levels, but I don't think anyone says Dodd-Frank is
    perfect. And I think this is a recognition that there could be
    some tweaks and modifications to make it work better.
        And that is why we have a bipartisan bill to look in and
    make some slight modifications. And I think this is an example
    of thoughtful bipartisan brainstorming.
        And I am sure that both sides are open to good ideas,
    whether it is from the panel or from other members on the
    committee to tweak or modify to make the bill even better.
        And I would note that the Ranking Member made a comment
    about loopholes for big banks. I don't think that is the intent
    of anybody on this committee. And if there is an issue with
    that I think we could all work together to address that concern
    that the Ranking Member may have.
        But I want to be clear on the way this bill works, and
    maybe to Mr. Bock? With the bank that is under the holding
    company, is there any entity that would regulate the bank under
    this bill 5059?
        Mr. Bock. Well, the bank is regulated by the OCC.
        Chairman Duffy. It is regulated by the OCC, right, so it is
    still going to be regulated, right?
        Mr. Bock. Yes, sir.
        Chairman Duffy. We feel like the OCC is a pretty good
    regulator?
        Mr. Bock. OCC has been a very good regulator.
        Chairman Duffy. I would agree. So let us look at the
    insurance companies that fall underneath the holding company.
    Would they be unregulated under this structure of this bill?
        Mr. Bock. They remain regulated, as they are today, by our
    State insurance departments.
        Chairman Duffy. But the State regulators, and so have they
    been pretty effective regulators over the last 150 years?
        Mr. Bock. They have been very effective and I would add
    that they continue to add to their toolsets and in terms of
    risk management and being able to look at our own risk. So yes,
    very effective.
        Chairman Duffy. And under this bill the Fed would still
    have a role at looking at and regulating the holding company.
    Is that correct?
        Mr. Bock. Absolutely. The bill continues to provide for
    that.
        Chairman Duffy. And so we have three great regulators who
    are taking a piece of the pie, who know how to regulate, have
    been successful in the regulation, in regulating different
    pieces of different businesses or industries, but it is fair to
    say we are trying to eliminate duplicative regulation. Is that
    fair to say, Mr. Mahaffey?
        Mr. Mahaffey. Yes, I would concur with that.
        Chairman Duffy. OK. And so if you heard Professor
    Schwarcz's testimony and his concerns about it, and I think he
    always gives wise and smart testimony. I don't always agree
    with it, but would you agree with his assessment on the dangers
    posed by this bill?
        Mr. Mahaffey. Well, I think he raises good points and I
    share your comments and your perspective that there is no
    intention here to create any loophole that would allow for an
    entity that is unaffected by this to somehow get into this and
    create a small insurance entity that stands above a big bank.
        So I think anything that can be explored to tighten that
    loophole we would be in support of. That is clearly not the
    intent of this.
        Chairman Duffy. Right.
        Mr. Mahaffey. And I think you said this well. This is not a
    matter of us seeking to eliminate the role of Federal
    supervision. This is a matter of sequencing and right-sizing
    it, recognizing what we would consider to be the primary role
    of the State insurance departments in regulating that insurance
    entity.
        So I think you summarized it well. At the bank level there
    would be the OCC, who supervises the bank. At the insurance
    holding company level that is comprehensive and does now
    include both legal entity and consolidated responsibilities for
    supervision, that would fall to the insurance departments.
        And then the Fed would remain in the ability to monitor,
    receive information, receive information from the insurance
    departments as well as the insureds and have the ability to
    understand whether there are any supervisory gaps within that
    insurance holding company system and reinsert themselves if
    those were the cases.
        Chairman Duffy. And I want to be clear on one point because
    I think this was a smart number, but you guys can tell me if
    you think I am wrong, but this is not a new regulatory regime
    for a bank structure that will buy an insurance company held
    under the holding company. You have to have 75 percent of your
    assets under the holding structure in the insurance business.
        Mr. Bock, is that your understanding?
        Mr. Bock. Absolutely. You would have to buy a lot of
    insurance companies in order to exceed that threshold.
        Chairman Duffy. And I would just--maybe I will read from
    page 2. It says, ``A savings and loan holding company that held
    75 percent or more of its total consolidated assets in an
    insurance underwriting company or insurance underwriting
    companies.''
        And so I think that part was pretty clear. I only have a
    couple of moments left and maybe other people will get to this.
    I do think a point that is usually made is an AIG point in
    regard to insurance, but I think it is always critical to point
    out that it was the financial products unit at AIG that created
    a lot of the issues, as opposed to the entities that we are
    talking about under this bill.
        My time has expired.
        The Chair now recognizes the Ranking Member, Mr. Cleaver,
    for 5 minutes.
        Mr. Cleaver. Thank you, Mr. Chairman.
        Let me get right to one of the significant points that this
    hearing must address, I think. And because those who are
    opposed to this legislation are saying that this is a solution
    in search of a problem, a hammer in search of a nail, false
    teeth in search of food.
        What I need to find out from you is whether you agree with
    that. Do any of you agree with any of the three examples,
    except the teeth?
        Mr. Bock. I would probably cast it a different way as 5059
    is something we have been waiting for. We applied for
    deregistration in 2012 but stopped our deregistration process
    awaiting for legislative relief. So in terms of a hammer
    looking for a nail, I believe it is the appropriate tool that
    we need now to right-size regulation and remove the
    duplication.
        Mr. Cleaver. Mr. Schwarcz?
        Mr. Schwarcz. Thank you. I want to address that issue, but
    if I may, I just need to turn back some--it is really one of my
    more important points and it goes to questions that Mr. Duffy
    was raising. So actually I understand that you characterize the
    intent of the bill, but I actually don't think you accurately
    characterized the effect of the bill.
        So I just want to clarify how it is drafted so that you can
    re-draft it to reflect that intent because the way an insurance
    savings and loans holding company is defined on page 2 of the
    bill, is any one of three circumstances can be met in order for
    you to qualify as an insurance savings and loans holding
    company.
        And you quoted from portion two of that definition, which
    contains a quantitative threshold for your assets. So in order
    to fall under subpoint 2 you would have to have 75 percent of
    your assets in an insurance holding company.
        Subpoint 1 though, defines any entity that has a top tier
    savings and loans holding company that is an insurance
    underwriting company as an insurance savings and loans holding
    company irrespective what percentage of its assets are in
    insurance.
        The effect of that is, and I know this is not your intent,
    JPMorgan tomorrow, if you pass this bill, could have its top
    tier holding company start issuing insurance, fall within an
    insurance savings and loans holding company, and then avoid
    Federal supervision.
        So this is just an error in the bill that needs to be fixed
    in my view, and I really hope that even if you support the
    spirit of the bill that you fix this.
        To get to--and I apologize but I just really needed to make
    that point--to get to the underlying question, I do believe
    that there are issues here that are important to address.
        I believe that Federal supervision of insurance savings and
    loans holding companies should be tailored to the risks that
    are posed by those entities. And I believe that it shouldn't be
    duplicative with general oversight that insurance regulators
    are conducting.
        But my understanding is that the Fed is very open to that.
    That the Fed currently doesn't engage in oversight of the State
    licensed insurance entities and that its oversight is focused
    at the group level to make sure that broader risk management
    concerns are being addressed. That is actually not the focus of
    State insurance regulation.
        So my view is that right now is maybe there is a problem
    but this is not the solution, at least as it is currently
    drafted.
        Mr. Cleaver. Well, thank you. I am taking the devil's
    advocate position here. I am not--well, let me do it in a--I
    don't want to attack the devil, but I am looking for the
    validity of the legislation--how necessary it is.
        And I said it in my opening statement that I am frustrated
    about duplicative or pedantic example, compliance cost, which I
    think my Republican friends and I, we agree on the need to
    reduce this.
        But I need to understand as clearly as you can in 20-
    something seconds, how this is hurting your business?
        Mr. Mahaffey. So if I could? I think the easiest proof is
    in the number of entities that are voluntarily divested or
    closed their banks in response to Federal Reserve supervision.
    Most of the entities we are talking about being affected by
    this bill had thrift operations before the financial crisis.
    They did not enter them post-financial crisis. But a number of
    entities have voluntarily decided to exit these businesses
    because, in their judgment, the costs simply outweighed the
    benefits.
        Nationwide continues to believe that this provides a
    valuable product and service offering to our members, but the
    costs are significant. And despite the best intentions of the
    Federal examiners that are on the ground, there is unavoidable
    duplication.
        Our holding company, our top tier company is a licensed
    insurance entity and so there is unavoidable redundancy in
    terms of what gets examined, the standards that are applied to
    those exams. There are over 200 SR (supervision and regulation)
    letters that are applied to us, most of which have equivalent
    standards that are different in the State insurance world.
        So it is a reallocation of significant amounts of resources
    away from those exams to the Federal Reserve Exams. There is a
    heavy dose of education because by and large while the Fed has
    done a lot to come up to speed and staff up, it has required an
    inordinate amount of investment from the companies that are
    supervised to continue to work with them on the differences
    between insurance.
        And again, I do not fault the Federal examiners.
        Mr. Cleaver. Time is up.
        Chairman Duffy. The gentleman's time has expired. That was
    a very long 20 seconds, but we appreciate the answer.
        The Chair now recognizes the Vice Chairman of the
    subcommittee, Mr. Ross, the gentleman from Florida, for 5
    minutes.
        Mr. Ross. Thank you, Chairman.
        And then Mr. Bock, you have commented in your testimony on
    the cost and inefficiency of the Federal Reserve supervision
    and in fact, to follow up on Mr. Cleaver's, the Ranking
    Member's questioning, can you cite some examples of regulatory
    duplication as a result of current law?
        Mr. Bock. So regulatory duplication, the amount of
    reporting to the Federal Reserve is breathtaking. And they took
    a number of reports. So we actually provide to our own
    regulator, to the insurance regulators, like our own risk self-
    assessment every--
        Mr. Ross. And then you turn around and report it to the
    OCC--
        Mr. Bock. Absolutely.
        Mr. Ross. --and the Federal Reserve. Right?
        Mr. Bock. Absolutely. So the financial reports, et cetera,
    everything--
        Mr. Ross. And that inures to your bottom line no doubt.
        Mr. Bock. Absolutely. Absolutely. So we spent an
    additional, let us say, 25 percent of our time responding to
    the same issues that we always respond to our--
        Mr. Ross. And this current law is predominantly why Country
    Trust Bank is no longer in existence, correct?
        Mr. Bock. Well, we are in existence still with trust-only
    powers, so--
        Mr. Ross. OK.
        Mr. Bock. --so we deregistered for trust-only powers
    specifically to keep serving our customers but also to reduce
    the costs which had no benefit of Federal oversight.
        Mr. Ross. Mr. Schwarcz, I appreciate you raising concerns
    related to regulatory arbitrage, and I appreciate you being
    here and I can assure that I think that we would all agree that
    the intent here is not to provide a creative way for financial
    services conglomerates to avoid Federal oversight.
        In fact, I believe the bill provides certain safeguards
    against this possibility by using a number of mechanisms, of
    which you alluded to. It defines an insurance savings and loan
    holding company as a savings and loan holding company that
    holds 75 percent or more of its total assets in an insurance
    underwriting company or companies, and it requires 75 percent
    threshold to be met in the most recent four consecutive
    quarters.
        And it has to also have been a savings and loan holding
    company to have been registered before July 21, 2010. Now,
    these are some pretty significant safeguards. Are you
    suggesting that these aren't?
        Mr. Schwarcz. Yes. No, I am suggesting they are and you are
    not--and I am suggesting you are actually not reading the bill
    correctly. If you look at page 2--
        Mr. Ross. All right. Yes.
        Mr. Schwarcz. --line 23, it is an ``or.''
        Mr. Ross. So you suggest we put an ``and''?
        Mr. Schwarcz. Wait, so just let--well, if you put an
    ``and'' that would definitely--
        Mr. Ross. That would resolve it?
        Mr. Schwarcz. That would resolve it but I think it would
    create other problems because actually several of these
    companies would no longer be an insurance savings and loans
    holding company.
        Mr. Ross. Well, but really what other problems would it
    create? It is not a less regulatory scheme as you say.
        Mr. Schwarcz. Oh, no, it absolute is.
        Mr. Ross. On whose part?
        Mr. Schwarcz. Well, I don't understand. If you are saying
    it is not--
        Mr. Ross. Well, I don't understand either because, you see,
    there are two regulators here.
        Mr. Schwarcz. Right. Wait--
        Mr. Ross. Well, there are three in the Fed and there is one
    in the State.
        Mr. Schwarcz. Yes. No, but let me try to answer, just--
        Mr. Ross. Oh, please do.
        Mr. Schwarcz. Yes, OK, great. Thanks. So just let me be
    very clear. The definition of an insurance savings and loan
    holding company under the bill allows you to qualify if you
    meet any one of three criteria--
        Mr. Ross. Which are fairly stringent.
        Mr. Schwarcz. No.
        Mr. Ross. Which will also prevent--
        Mr. Schwarcz. No. The--
        Mr. Ross. Yes, they are.
        Mr. Schwarcz. The criteria--
        Mr. Ross. Are we going to go back in time to July 21st
    period?
        Mr. Schwarcz. The criteria that you own that your top tier
    savings and loans holding company is an insurance underwriting
    company can be satisfied if you take your top tier company and
    you get licensed in one State to sell any insurance you
    qualify.
        Mr. Ross. And that causes less stringent regulation?
        Mr. Schwarcz. Of course. If you--
        Mr. Ross. To whom? What about the State regulator? Are you
    demeaning the State regulator by saying they don't require
    stringent regulation?
        Mr. Schwarcz. Let me answer--
        Mr. Ross. I don't think you do. I think what we are doing
    is we are allowing the consumers to have the benefit of what
    has been probably the most efficient, effective and cost
    effective regulatory environment out there, and that is the
    State.
        Mr. Schwarcz. I think it is interesting--
        Mr. Ross. Your testimony is incorrect. It doesn't require
    this law to come into effect to allow for less stringent
    regulation, just the opposite.
        Mr. Schwarcz. I think it is really funny that you are
    saying that it is not stringent regulation but there are all--
        Mr. Ross. Well, you said it wasn't stringent regulation.
    You said this bill will lead to less stringent regulation and
    I--
        Mr. Schwarcz. Of course it will.
        Mr. Ross. --take you to task to that.
        Mr. Schwarcz. Because the--
        Mr. Ross. In the academic world yes, but maybe not in the
    real world.
        Mr. Schwarcz. The Fed is not regulating you at the holding
    company level unless certain--
        Mr. Ross. But you are going to regulate--
        Mr. Schwarcz. --criteria are met.
        Mr. Ross. --them at a State level.
        Mr. Schwarcz. Yes, that is less stringent regulation.
        Mr. Ross. Correct. And that is not stringent. State level
    is less stringent?
        Mr. Schwarcz. OK.
        Mr. Ross. The best consumer protections we have out there
    in any type of regulatory environment in this world and you are
    saying it is less stringent? The most significant, that is
    closer to the consumer, you are saying is less stringent?
        Mr. Schwarcz. Can I answer or are you just going to talk to
    me?
        Mr. Ross. --you are saying less stringent?
        Mr. Schwarcz. Well, I will answer if you want.
        Mr. Ross. I think you already have answered.
        Mr. Schwarcz. Well, I don't--
        Mr. Ross. Go ahead.
        Mr. Schwarcz. OK, sure. It is less stringent yes. That is
    precisely why there is less cost if you, in fact, avoid the
    regulation.
        Mr. Ross. And less cost is bad?
        Mr. Schwarcz. No, it is good, but it is also--
        Mr. Ross. Thank you.
        Mr. Schwarcz. --relates to there being less regulation. I
    don't understand how you can simultaneously say--
        Mr. Ross. It is because of--
        Mr. Schwarcz. --we are reducing the regulatory burden but
    we are not reducing regulation. The two go hand-in-hand.
        Mr. Ross. Well, you already have duplicative regulatory
    burden that has been in existence since Dodd-Frank. We are
    trying to remedy that and that is what this does and still
    allows for stringent regulation on behalf of the States.
        Mr. Schwarcz. Whether or not it is appropriate we can
    debate about that. It does reduce the amount of regulation. OK?
        Mr. Ross. It is duplicative regulation.
        Mr. Schwarcz. It may reduce duplicative--
        Mr. Ross. And that is a bad thing? That in and of itself is
    indicative of why we have a difference here.
        Mr. Schwarcz. If you create a--it is a bad--
        Mr. Ross. I think we need less regulation when it burdens
    the consumers.
        Mr. Schwarcz. OK.
        Mr. Ross. I yield back.
        Chairman Duffy. The gentleman's time has expired.
        The Chair now recognizes the co-author of this bill, the
    gentlelady from Ohio, Mrs. Beatty, for 5 minutes.
        Mrs. Beatty. Thank you so much, Mr. Chairman and Ranking
    Member. I have a series of questions so I am going to ask you
    for shorter answers.
        But first, Mr. Chairman and Ranking Member, I would like to
    enter this statement for the record. It is a letter from the
    American Council of Life Insurers supporting this bill.
        Chairman Duffy. Without objection.
        Mrs. Beatty. Again, let me thank all of the witnesses here
    and say how much respect I have for all three of you. And at
    any time in my career that I have read something from all three
    of you, here is a good answer: I have agreed with all of you on
    some things.
        So we are going to take it down a little notch here and
    first let me say to you, Professor Schwarcz, that I appreciate
    your comments. And you would be happy to know that we are
    already in some discussions about making some changes which are
    no doubt important.
        But after hearing Mr. Bock's story about COUNTRY Financial,
    Professor Schwarcz, do you believe that spending 25 percent of
    a company's compliance cost on a subsidiary that accounts for
    only 0.2 percent of a company's total assets is excessive and
    burdensome? And a quick answer.
        Mr. Schwarcz. Yes, it may well be. I do think that there is
    a very important goal here of reducing regulatory costs. I just
    think we need to do so appropriately.
        Mrs. Beatty. OK. So let me say to all three of you that we
    have three members from the great State of Ohio here so to my
    good friends from Nationwide, I know I speak on behalf of my
    other two colleagues and you may later tell my two Republicans
    that I spoke for them today, in thanking you.
        But also beyond this I want to thank you for running an
    outstanding business and that you have been a true partner to
    the community to help Columbus and central Ohio to keep us
    moving forward.
        Mr. Mahaffey, this question is for you. Nationwide is
    subject to group-wide supervision by the Ohio Department of
    Insurance. Is that correct?
        Mr. Mahaffey. That is correct.
        Mrs. Beatty. In addition to being regulated by the State of
    Ohio, are you not also subject to financial condition
    supervision and regulation in Arizona, California, Iowa,
    Michigan, New Jersey, New York, Texas, as well as subject to
    insurance regulations in all 50 States and the District of
    Columbia?
        Mr. Mahaffey. Yes.
        Mrs. Beatty. And on the Federal level are you regulated by
    FINRA, the OCC, SEC, Department of Labor, IRS, and subject to
    group-wide supervision by the Federal Reserve?
        Mr. Mahaffey. Yes, that is also correct.
        Mrs. Beatty. Seems like a lot of regulations to me. Are you
    aware of any other class of financial institutions that have
    dual holding company supervision by the Federal Reserve and
    another prudential regulator?
        Mr. Mahaffey. No, not in the U.S.
        Mrs. Beatty. Are insurance savings and loan holding
    companies regulated on a group-wide basis by two regulators
    because they are the biggest and most complex insurance company
    if they were to fail that would bring down the U.S. economy?
        Mr. Mahaffey. No.
        Mrs. Beatty. And who has had more experience and more
    expertise in regulating insurance companies, such as
    Nationwide, the Ohio Department of Insurance or the Federal
    Reserve?
        Mr. Mahaffey. Cleary the State departments.
        Mrs. Beatty. If this bill were to become law would you
    still be regulated by the Ohio Department of Insurance and all
    other States you do business in?
        Mr. Mahaffey. Yes.
        Mrs. Beatty. Your depository institution will still be
    regulated by OCC. Is that correct?
        Mr. Mahaffey. That is correct.
        Mrs. Beatty. And you will still have to comply with the
    Federal Reserve's insurance capital requirement, submit various
    reports to them and be subject to direct supervision if the
    Federal Reserve believed that your company was in material
    distress. Is that correct?
        Mr. Mahaffey. That is correct. And I would include in those
    capital standards prospective stress testing as another
    requirement.
        Mrs. Beatty. OK. Can you explain the benefits Nationwide's
    depository institution provides to your business, your
    customers, and why you have made a decision to not get rid of
    it?
        Mr. Mahaffey. Sure, and I will--being as brief as possible,
    one benefit we have as a mutual insurance organization is the
    benefit of diversification of our risk portfolio. That is the
    benefit of anybody buying insurance is diversified risk.
        The bank gives us another business with uncorrelated risks
    to the rest of our business. More directly to our members, to
    those people we exist to serve, it provides additional products
    and services that we can uniquely tailor to their needs that
    work in concert with the other products and services we offer.
        The examples I gave in my testimony of prepaid claims cards
    and emergency debit cards for folks in the wake of natural
    catastrophes are perfect examples of that.
        Mrs. Beatty. And last, do you not believe that the State-
    based insurance system that has governed this country's
    insurance system for almost 150 years is effective and time-
    tested?
        Mr. Mahaffey. Yes.
        Mrs. Beatty. Thank you, Mr. Chairman. And I yield back.
        Chairman Duffy. The gentlelady yields back.
        The Chair now recognizes another author of this bill, the
    gentleman from Pennsylvania, Mr. Rothfus, for 5 minutes.
        Mr. Rothfus. Thank you, Chairman, and again, I want to
    thank my colleague, Mrs. Beatty, for her work on this
    legislation. She introduced a letter from the ACLI. I would
    like to offer for the record letters of support from the
    Property Casualty Insurers Association of America, as well as
    the National Association of Mutual Insurance Companies for the
    record.
        Mr. Chairman?
        Chairman Duffy. You had--
        Mr. Rothfus. Yes, I wanted to offer for the record a couple
    of letters of support, one from the Property Casualty Insurers
    Association of America and the National Association of Mutual
    Insurance Companies.
        Chairman Duffy. Well, without objection.
        Mr. Rothfus. I want to talk a little bit about the Ranking
    Member raised this issue. Is this a solution in search of a
    problem?
        So if I can go to you, Mr. Mahaffey? And again, we have
    heard from Mr. Bock about their compliance costs. Can you
    elaborate on how Fed supervision has affected compliance costs
    in Nationwide's business of operations and compliance costs?
        Mr. Mahaffey. Yes
        Mr. Rothfus. OK. Can you quantify it at--
        Mr. Mahaffey. We have similar experiences. It is a
    reallocation of finite resources. And to be clear, we have
    added resources to comply with those Fed standards and
    regulations and examinations.
        I think the estimate of 25 percent to 30 percent of, for
    example, my team's time in enterprise risk or in the compliance
    function as an example, being reallocated to these is a
    reasonable estimate. But I would also argue that those costs
    that are very difficult to quantify go well beyond just those
    dedicated teams that have direct responsibility for the
    relationship in conducting the exams.
        It is a prominent focus all the way from the board through
    senior management to direct frontline associates given the
    extensive nature of the supervision and the ongoing presence of
    examinations. So the costs are material and there are specific
    examples where we have had to incur very specific costs to
    stand up programs that comply with Federal Reserve
    expectations.
        Mr. Rothfus. Can you tell us what aspects of Fed
    supervision are inappropriate for an insurance company?
        Mr. Mahaffey. I would start by highlighting the differences
    in the nature of their supervisory frameworks that they bring
    to bear, as we have all said in our testimony they come with a
    banking-developed toolkit. So the basis from which they engage
    and--
        Mr. Rothfus. Notwithstanding that they were supposed to be
    getting some expertise in insurance. You still find this to be
    a problem?
        Mr. Mahaffey. And I would say yes, we do still find it to
    be a problem and I will still give them credit for working with
    us, for example, on the Capital Standards Clarification Act and
    the capital standards in the wake of that. We found them to be
    very willing partners, but you are talking about an immense
    body of knowledge that has been developed over decades
    exclusively with the banking arena.
        And porting that over into an insurance world has inherent
    inefficiencies. And when you apply that at the group level,
    redundancy and duplication is unavoidable.
        Mr. Rothfus. Mr. Bock, we have heard from Mr. Mahaffey
    about how Nationwide used it as S&L. Can you elaborate on what
    role the former S&L played for COUNTRY?
        Mr. Bock. It is still our trust bank. It houses our wealth
    management business, so it still exists. It was a grandfathered
    unitary savings and loan holding company that was under OTS
    from Gramm-Leach-Bliley.
        But we wished to hold ourselves with that status through
    conversion into being regulated by the Federal Reserve, but
    found, as we have said, the costs were way too high for the
    benefit that it was providing to our policyholders.
        Mr. Rothfus. What kind of consumer impacts would you see as
    a result of this action for your customers?
        Mr. Bock. This action that we took?
        Mr. Rothfus. Yes.
        Mr. Bock. It obviously reduced our costs. We now spend our
    time focused on those risks and those things that are most
    beneficial to our policyholders. And it allows us to let our
    regulators play the role that they should play, the State
    regulators regulating us, OCC, et cetera.
        Mr. Rothfus. Mr. Mahaffey, is Fed supervision as it is
    currently conducted necessary to protect against systemic risk?
    Or is it possible to achieve the same goal more efficiently
    with respect to Nationwide?
        Mr. Mahaffey. We definitely think it is possible to achieve
    the same goal more efficiently. And you mentioned systemic
    risk. I will note that the Fed has said publicly on many
    occasions that these ISLHCs that we are talking about do not
    pose systemic risks.
        And this bill does not touch the authority of the FSOC to
    designate anybody who would pose a future systemic risk to come
    back into Federal Reserve supervision.
        As it is currently conducted, there are definitely
    opportunities. We think this bill addresses that opportunity.
        Mr. Rothfus. In working on this legislation, I wanted to
    ensure that this bill solves the problem we have identified
    while guaranteeing that vital information gets to the
    appropriate regulator. Again, this is about right regulating,
    not deregulating.
        Mr. Mahaffey, can you please talk a bit about how this bill
    would change which reports you provide to which regulators and
    why that deconfliction is important?
        Mr. Mahaffey. Yes. So the way I would describe this is this
    would respect the primacy of the department of insurance in the
    State of Ohio as the primary day-to-day supervisor and examiner
    of Nationwide.
        The Federal Reserve would have access through the State
    department of insurance for all of the information that they
    would garner from Nationwide in the same way that all of the
    other States that play a supervisory role for Nationwide
    patriate and cooperate with Ohio for that information.
        It would also provide them with direct access to a lot of
    individual information on financial reporting, holding company
    structure, legal entity structure, business structure, and all
    of the necessary requirements for their capital standards.
        So they would have direct access for the important
    information necessary to monitor that system. We think that
    construct provides a ton of efficiency for Nationwide by
    removing that day-to-day duplicative examination burden that
    really requires that inordinate amount of time that I described
    and Mr. Bock described.
        Mr. Rothfus. Thank you. My time has expired.
        Chairman Duffy. The gentleman's has expired.
        The Chair now recognizes the gentlelady from New York, Ms.
    Velazquez, for 5 minutes.
        Ms. Velazquez. Thank you, Mr. Chairman.
        Mr. Bock, there are currently 12 insurance savings and
    loans holding companies that fall under Federal supervision due
    to the fact that they own a depository institution. Can you
    give us a description of these companies? What business are
    they in? What type of products do they offer? What is the risk
    profile?
        Mr. Bock. I can--thank you. I can give you just a quick
    thought as they range from companies that are very
    multidimensional like Nationwide, that serve a broad range of
    customers, all the way down to companies such as Westfield,
    which serves a regional market, the same thing, its customers.
        And so the banks are therefore focusing on customer
    products and diversification, as Mr. Mahaffey said. So in terms
    of their risk, it is absolutely limited because of the current
    supervisory structures that they had prior to Dodd-Frank.
        Ms. Velazquez. OK. So what does owning a thrift allow these
    companies to do that they otherwise wouldn't be able?
        Mr. Bock. In today's world, obviously financial security is
    important for every home, every customer, and it allows
    insurance companies to focus on the needs of protection as well
    as preservation of assets. And so it serves a broader range of
    protection, but also protection for great retirements, et
    cetera. So that is--
        Ms. Velazquez. Thank you.
        Mr. Bock. --that is my personal view.
        Ms. Velazquez. Thank you.
        Mr. Mahaffey, same question to you. What does owning a
    thrift allow Nationwide to do that otherwise would not be able
    to?
        Mr. Mahaffey. So the purpose of our thrift institution is
    not to create a large independent bank that serves non-member
    customers for Nationwide. And it is quite the opposite.
        Our owning of a thrift is designed to create products and
    services that augment our existing insurance and financial
    services products in ways that we think create convenience and
    other sources of value for our members, like those post-
    catastrophe claims cards and debit cards, things that would be
    very difficult to execute if we were doing with a third-party
    partnership because they would have a different interest in
    how--
        Ms. Velazquez. Thank you.
        Mr. Mahaffey. --they serve our members.
        Ms. Velazquez. Professor, would you care to comment on it?
        Mr. Schwarcz. Yes, so I think that it varies, and I think
    that in certain contexts, like Nationwide the bank may be very
    small. For other insurance savings and loans holding companies
    the bank actually can be a substantial portion of the company.
        So just for instance, USAA, I think their bank has $80
    billion in assets. TIAA just acquired EverBank, which I think
    had many, many billions of dollars in assets and used to
    operate as a freestanding banks.
        The other point I would just make is, banks allow you to
    serve your customers in unique ways. They also do create unique
    risks and that is because they are Federally insured. They are
    unique in that respect. And that is why banking regulation is
    different than other types of regulation and it is also why it
    has to occur both at the level of the individual bank and at
    the holding company level.
        If you only have bank regulation at the individual level of
    the bank then there is a substantial risk that that bank can
    actually be either exploited by its non-bank affiliates or can
    actually be destabilized by those entities.
        Ms. Velazquez. Thank you.
        Mr. Mahaffey, I am very concerned about bifurcated
    regulation, and I am concerned about the regulatory regime this
    bill creates. I was here in 2008 and witnessed the near
    collapse of AIG and how it and other firms like it nearly
    destroyed the financial system and world economy.
        Please tell me how H.R. 5059 can both relieve the
    duplicative regulation that you spoke to and yet guarantee the
    public that we are not ushering in another AIG.
        Mr. Mahaffey. Thank you for the question. I think it is
    important to note that this does not remove the role of Federal
    supervision from the group level. It simply delineates it from
    the role of the State and in my opinion sequences it so that it
    has a complementary role not a redundant role.
        So what we are seeking to do, and I think Chairman Duffy
    described it very well, as it related to our bank we have an
    OCC-dedicated regulator that would be full-time. We have a
    group consolidated supervisor at the State level and the Fed
    would still remain responsible for the holding company with
    review authority for all of the information and ensuring the
    completeness of coverage of regulators within the holdco with
    the ability to step back in if we fail certain tests, like the
    capital standards.
        Ms. Velazquez. Thank you.
        Professor, your take on this question?
        Mr. Schwarcz. So first, I agree that a very important
    element of this bill is that it doesn't restrict FSOC's ability
    to designate firms like AIG as systemic, so I do think that
    that is an important point and one reason why it is not as
    dangerous a bill as it very much otherwise could be.
        So I don't think we are talking about systemic risk
    concerns. I think what we are talking about instead is the
    concern that American taxpayers will end up having to incur the
    costs associated with bailing out a bank that failed because of
    its non-bank affiliates.
        Ms. Velazquez. Thank you.
        Mr. Schwarcz. Yes.
        Ms. Velazquez. Thank you, Mr. Chairman. I yield back.
        Chairman Duffy. The gentlelady's time has expired.
        The Chair now recognizes the gentleman from Missouri, the
    Chair of the Subcommittee on Financial Institutions, Mr.
    Luetkemeyer, for 5 minutes.
        Mr. Luetkemeyer. Thank you, Mr. Chairman.
        And welcome to our guests. And I want to thank Mr. Rothfus
    for his common sense legislation here that I think Mr.
    Mahaffey, you just really did a good job of summarizing what we
    are trying to do here is not to deregulate but to find a way to
    not have this burden--this extra layer of regulation there that
    could cause us costs and confusion, so appreciate that.
        Also I appreciate Professor Schwarcz's comment a little bit
    ago with regards to tailoring regulations to risk. I think that
    is extremely important.
        I think we are trying to do that as a committee on a lot of
    levels to try and find ways to make sure that the regulations
    are not there to be more punitive than necessary and continue
    to allow the freedom of businesses to do their job but at the
    same time making sure there is a box within which they operate.
    And you have to tailor the regulations to make sure that you
    protect that--box. And I appreciate that comment from the
    professor.
        Mr. Mahaffey, you have been very articulate with regards to
    how your company is working through this and I just have one
    more question for you with regards to the relationship with the
    Federal Reserve and your ability to do your job.
        If the Federal Reserve is overly cumbersome how does it
    really affect your business to assess and do your job with
    regards to insurance risk?
        Mr. Mahaffey. To the extent we are allocating scarce time
    and energy amongst my staff or other risk-related staff within
    the organization, if we are doing so in a duplicative manner
    that probably actually results in less time for other material
    risks that could otherwise use that time.
        And I would point to the fact that because there are
    inherent differences in the risk profile of insurance entities
    versus banking entities, that by and large has meant we are
    pulling time away from what I would consider to be potentially
    more material risks on the insurance side on natural
    catastrophes, mortality, morbidity. These are not risks that
    exist in a banking construct.
        So all of our time and energy is spent competing for where
    we allocate that time to manage these risks. This would reduce
    duplication and allow us, I think, to be more efficient in the
    allocation of risk management time, which, by the way,
    coincides with the ability to protect policyholders and
    depositors.
        Mr. Luetkemeyer. I think, Mr. Bock, a while ago you
    mentioned something about the regulators using bank standards
    to regulate insurance companies? I believe you made a comment
    to that effect? I am sure you didn't mean that, but I am
    curious as to what was going on with that comment, because it
    raised some--
        Mr. Bock. Our experience. Yes, thank you. Thank you. Our
    experience was that the standards they use, the SR that Mr.
    Mahaffey referred to, were the same ones that came from the
    banking experiences. So yes, we were hoping for tailored or
    appropriate--
        Mr. Luetkemeyer. So they really were using and really
    inaccurate standards in your judgment?
        Because you have two separate business models here, the
    banks and the insurance companies have two completely different
    business models and really you need to have two separate
    tailored rules for those folks. And yet the regulators were
    using more of a bank standard to analyze the insurance part of
    this? Is that what you are saying?
        Mr. Bock. I would say so not necessarily bank capital
    standard, but they were using their SRs, their bank checklists,
    to go through things like cyber-security risk, enterprise risk,
    et cetera. So they were not tailored to us as an insurer to our
    size as a--
        Mr. Luetkemeyer. OK. You are using the word were. Have they
    changed this now? Are they doing a better job?
        Mr. Bock. We left Federal supervision in--
        Mr. Luetkemeyer. OK.
        Mr. Bock. --in 2017.
        Mr. Luetkemeyer. OK. You had a buzzword there that is
    important to me. We are going to have a data security, cyber-
    security hearing this afternoon, and I have a bill that we are
    working on to try and address some issues there with data
    security.
        And so one of the questions that is going to come up this
    afternoon is the duplicative nature of all of the different
    rules and regulations with regards to data security and cyber-
    security notification across the country.
        You have 50 States and you have anywhere from 40 to 50
    different standards on things. Do you see some duplicative
    problems here with the way cyber is looked at with the Fed and
    State examiners?
        Mr. Bock. There is some duplication. I would say that the
    State insurance departments, the NAIC are looking to coordinate
    to ensure we have a common and a very thoughtful--
        Mr. Luetkemeyer. Do they work collaboratively on this?
        Mr. Bock. Excuse me?
        Mr. Luetkemeyer. Do they work together on this to make sure
    there is--
        Mr. Bock. I would say--
        Mr. Luetkemeyer. --no overlapping problem?
        Mr. Bock. I would say that it is emerging right now because
    the New York Department of Financial Services has been very
    vocal about how to improve cyber-security, how to improve
    cyber-security reporting.
        Mr. Luetkemeyer. I don't have much time left, so I will be
    very brief here.
        I think Mr. Mahaffey you made a great comment a minute ago
    with regards to the OCC is one regulator, the State's one
    regulator and the Fed regulates your holding company. I am not
    sure if some people understand the relationship between the
    bank that you have, the insurance company that you have and
    then the holding company.
        Could you just use a few minutes here, with the indulgence
    of the Chairman, to give that relationship so people understand
    why that is there and what the purpose of it is and how it is
    regulated?
        Mr. Mahaffey. Sure. So in our case our top tier holding
    company is a licensed insurance operating company, which means
    everything underneath that holding company is subject to State
    supervision. One of the entities within that then--
        Mr. Luetkemeyer. So the holding company actually owns both
    entities and then the Fed is examining that entity. Is that
    correct?
        Mr. Mahaffey. The State and the Fed examine the holding
    company, which includes all of--
        Mr. Luetkemeyer. OK.
        Mr. Mahaffey. --Nationwide's subsidiary entities and that
    holding company is a licensed insurance entity as well.
        Mr. Luetkemeyer. OK, thank you very much.
        Appreciate your indulgence, Mr. Chairman.
        Chairman Duffy. The gentleman's time has expired.
        The Chair now recognizes the gentleman from California, Mr.
    Sherman, for 5 minutes.
        Mr. Sherman. Mr. Bock, in your oral testimony you spoke
    positively about State regulation. Perhaps you could drill down
    into the specifics and help the committee better understand
    what processes State regulators use to ensure that consumers
    are protected?
        Mr. Bock. Thank you. The State regulators maintain a
    continuous discussion with us every day. They have the gold
    standard in financial reporting. The development over the last
    5 years of onerous self-assessment, enterprise risk management
    tools, et cetera, reports to them, really safeguard the
    customer.
        And so what I would say is their regulation and oversight
    is continuous. They know us. They've known us for the last 92
    years.
        Mr. Sherman. Thank you.
        Professor Schwarcz, we have to protect the depository
    institution in large part because it is federally insured. The
    management and directors of such an institution could make a
    number of mistakes in making bad loans. They could pay
    dividends and stock buybacks to deplete their capital.
        So if we are looking at the entity itself, the banking
    entity, why should we be more concerned if its ownership is
    affiliated with an insurance company than we should be about
    the entity itself if it isn't affiliated with an insurance
    company, but its board of directors may just not want to keep
    too much capital around?
        Mr. Schwarcz. It has actually been a principle of banking
    regulation for 70 years I would say that we have to regulate
    both the entity and the holding companies. The Bank Holding
    Company Act established that in the 1950's.
        And it has been the case for savings and loans holding
    companies before Dodd-Frank. I think that is a really important
    point. Before Dodd-Frank savings and loans holding companies
    are regulated at the holding company level.
        The reason is because failures of the non-bank affiliates
    can end up affecting the bank. It can end up being the case you
    get preferential loans to the non-bank holding company. It can
    end up being the case that there is no capital to be made.
        In other words, it can end up being a source of weakness,
    and we saw this with AIG. AIG's insurance companies were
    endangered by the fact that we had other entities that were not
    insurance entities that were in jeopardy. The same thing could
    happen with banks.
        Mr. Sherman. Well, the big problem there is that, and we
    have talked about this, is that we allowed AIG's unregulated
    entity to sell credit default swaps, which, at least I
    believed, to be portfolio insurance.
        Mr. Schwarcz. Right. I would just not forget about the
    securities lending operations as well, which were under the
    supervision of the insurance regulators. So there were issues
    on multiple levels with AIG.
        Mr. Sherman. Well, OK. To what extent can the--Professor
    Schwarcz, can the Federal Reserve further tailor its
    supervisions of insurance savings and loan holding companies in
    a responsible manner? What can we do? I know you don't want to
    go as far as the legislation before us. What can we do to limit
    the--
        Mr. Schwarcz. Well, no--
        Mr. Sherman. --regulatory burden?
        Mr. Schwarcz. --I think that is a really important question
    and I guess that is where I would focus if I were you, and that
    is where I would focus the injury. I would ask that question,
    how do we change it? I think the answer is you have less
    stringent supervision depending upon the size of your bank and
    depending upon the complexity of your organization.
        My concern is that this bill doesn't tailor because it
    actually cuts off the Fed's authority to regulate at the
    holding company level unless one of several clear triggers are
    hit. There is a capital deficiency or there is a determination
    that it is in material financial distress.
        And so my concern is that actually rather than tailoring
    you are actually going in the opposite direction of cutting off
    the Fed's ability to tailor. I have no qualms with the idea
    that perhaps the Fed--perhaps, I don't know--the Fed may need
    to better tailor its supervision--
        Mr. Sherman. I want to hear from Mr. Bock on that same
    issue.
        Mr. Bock. I think the bill does a very thoughtful way of
    still retaining the Federal Reserve's ability to step in to
    take action so it doesn't diminish the Fed's ability in any
    sense of at least the language in the bill.
        Mr. Sherman. I will yield back.
        Chairman Duffy. The gentleman yields back.
        The Chair now recognizes the gentleman from Illinois, Mr.
    Hultgren, for 5 minutes.
        Mr. Hultgren. Thank you all for being here. We appreciate
    your testimony and your work.
        I am going to address the first questions to Colonel Bock
    if I could? Again, thank you for your service. Also I know out
    of the 5,000 plus employees that you have, 3,600, I think, are
    in Illinois. So we are grateful for that, the big impact on our
    State and tons of customers as well. So grateful for that.
        I did want to just--and we have talked about this but I
    wanted to go into a little bit more specifics. In your
    testimony you noted that country Financial maintained a savings
    and loan holding company up until recently and then you made
    the decision to de-register it because the regulatory burden
    greatly outweighed the value to the company and your
    policyholders.
        I wonder if you can think of any other example in insurance
    or banking regulation where something that is 0.2 percent of
    your overall assets accounts for 25 percent of the hold--the
    company's total compliance staff resources? It seems obvious to
    me that Congress needs to revisit this duplicative regulation,
    but wondered if you could talk a little bit more about that?
        Mr. Bock. Yes, thank you. Obviously we kept registered,
    awaiting for regulatory relief, and we have been told that your
    supervision by the Federal Reserve is just your price of
    admission. But quite frankly, we were already at the movie. We
    were already at the movie and the admission cost went up.
        We sat and reviewed, just like Mr. Mahaffey did, to where
    we were spending an inordinate amount of time on something that
    was adding no value to our policyholders. And so really for the
    benefit of our policyholders it was a decision we had to make.
        Mr. Hultgren. I wonder if you could talk a little bit about
    the strength of State regulation? Could you be more specific
    about how State regulators supervise a company like yours and
    why is this regulation as good or better than Federal
    regulation could be?
        Mr. Bock. Well, I think this one gives a clear and
    thoughtful way of a division of responsibility, the division of
    labor. Our State regulators obviously get our financial reports
    consistently. They have the ability and the number of tools to
    be able to intervene and to question and to ask.
        So we also, at this point in time, are going through our 5-
    year financial exam, and that is an exam that lasts for at
    least a year or a year and a half. So there is nothing that our
    State regulators don't know about how we conduct business and
    they have market conduct evaluations, et cetera. So they have a
    huge toolbox with which to regulate us and which to interact
    with us.
        Mr. Hultgren. I know you have talked about this briefly,
    but wonder if you can go into just a little bit more detail of
    explaining why a change in law is necessary in order to have a
    State-based regulation as the primary approach?
        Mr. Bock. Well, obviously, we are strong supporters of
    McCarran-Ferguson because the State-based approach has
    consistently and continuously worked. When the Federal Reserve
    came to us, when we talk about regulation, it was duplication
    to a massive extent and with no benefits.
        So if I take a look at this legislation it actually does
    thoughtfully give a division of labor. It also has some
    safeguards, but it certainly doesn't allow someone--now, I
    can't imagine someone like JPMorgan Chase trying to become an
    insurance company and having the Federal Reserve Board allow
    that or having a bank buy an insurance company and the capital
    requirements or have an insurance company buy a bank and the
    capital requirements that it is required.
        So some of the things that sound like gaps are not gaps.
    They have absolutely been filled by our current regulatory
    scheme.
        Mr. Hultgren. That is helpful, thank you.
        Mr. Mahaffey, I have just a minute and a half or so left.
    The number of companies that would be considered insurance
    savings and loan holding companies under this bill has
    decreased significantly since the enactment of Dodd-Frank as
    firms have eliminated their thrift subsidiaries.
        Why would an insurance company maintain a thrift subsidiary
    and how has maintaining a thrift benefited Nationwide and its
    policyholders?
        Mr. Mahaffey. Well, again, we, like Mr. Bock, have been
    hopeful for regulatory relief and fixes, and we would again
    applaud the Fed for their ability within the confines of the
    current construct, the current regulatory regime, to be
    flexible where they can. But we do think that this bill goes
    further and actually changes the very construct in which both
    the State and the Fed need to operate to align them better.
        Without this it does raise questions amongst most of those
    institutions about whether the cost justifies the benefits to
    the holding company. In Nationwide's case we have continued to
    own and operate our bank precisely because we continue to see
    the potential for massive benefit to our policyholders to
    continue to offer these products and services.
        Mr. Hultgren. Thanks. In just the last few seconds, I
    wonder if you could talk a little bit about how this bill, H.R.
    5059, would reduce its compliance cost for Nationwide?
        Mr. Mahaffey. It would dramatically reduce compliance costs
    and I would say allow us to redirect our resources to what we
    would consider to be the more material risk profile of an
    insurance organization because it would sequence and it
    wouldn't eliminate the role of the Fed, but it would keep them
    in a monitoring mode to ensure sufficient coverage by the State
    regulators and other regulators within the holding company and
    only to step in and then subject us to examinations in the bevy
    of SR letters we have referred to in the event we fail capital
    standards, stress test or there is an entity within our holdco
    that is not functionally supervised. So it would be exception-
    based.
        Mr. Hultgren. Thank you very much. My time is up.
        I yield back.
        Chairman Duffy. The gentleman yields back.
        The Chair now recognizes the gentleman from New Jersey, Mr.
    MacArthur for 5 minutes.
        Mr. MacArthur. Well, thank you. Good morning and thanks for
    being here.
        Mr. Mahaffey and Mr. Bock, if your thrift had gotten into
    trouble and you needed to move assets to help it, would you be
    able to do that from your insurance company holdings without
    approval from State regulators?
        Mr. Bock. No.
        Mr. Mahaffey. No, and I would simply add the caveat,
    however, that as a mutual insurance organization we target
    having sufficient levels of capital, very conservative levels
    of capital by most measures because all of our entities within
    our organization share the same brand.
        And so it would be in our consolidated interest to make
    sure that all of our entities, including the holding company,
    have sufficient capital to weather all of those sources of risk
    within the holding company.
        Mr. MacArthur. So it would be fair to say then that there
    would be no material risk to your policyholders because of
    problems at the thrift?
        Mr. Mahaffey. Speaking for Nationwide Bank, it has roughly
    $7 billion in assets and is part of a holding company with $230
    billion in assets, so I would suggest to you that the risk
    posed within our depository relative to our overall holding
    companies is de minimis.
        Mr. Bock. I would say the same. Our life insurance company
    owns the bank. The life insurance company has $1.2 billion of
    surplus. Our bank assets are about $25 million and so in terms
    of a material risk to the life company, no. And I would also
    add that the State insurance regulators review carefully
    ownership of affiliates.
        Mr. MacArthur. Sure. I will come back to the exceptions
    with Professor Schwarcz, because you have mentioned them, but
    it makes me feel like if I have this glass of water and I put a
    drop of lemonade in it I haven't turned it--or a drop of lemon
    juice I haven't turned it into lemonade. It is still a glass of
    water.
        And an insurance company that has a thrift it doesn't turn
    it into a bank. It is still what it was. It just has a thrift.
        Professor Schwarcz, you implied in your opening statement
    that a company, a bank, if it wanted to avoid Federal oversight
    could simply declare itself an insurance company and skirt the
    rules. Are you aware of any State that allows an insurance
    company to be formed without achieving certain capital
    requirements?
        Mr. Schwarcz. No. Every State you have to be licensed and
    you have to meet certain capital requirements. But under the
    bill, if you could convince one State to license your top tier
    affiliate and you could put capital in there, then you would
    actually not be subject to routine Federal oversight. So that
    is the issue.
        Mr. MacArthur. Well, you would not be subject to oversight
    in one construct but you still would be subject to bank
    oversight from the OCC and insurance oversight from insurance
    regulators.
        Mr. Schwarcz. But you would be able to escape bank holding
    company regulation, which is essential for large banks.
        Mr. MacArthur. Well, and you didn't say this, but I
    inferred it from your comments that you are concerned that
    insurance regulators might not have the capacity and the
    expertise to regulate a bank holding company, right, or a
    company engaged in banking? Is that fair?
        Mr. Schwarcz. Well, that is fair and then also just an
    important related point, Federal funds are on the line with the
    bank because they are Federally insured. So if you have a
    Federally insured institution you want Federal regulation to
    match that source of liability.
        Mr. MacArthur. Can you tell me what percentage of Federally
    insured bank assets have actually been put at risk in any given
    year?
        Mr. Schwarcz. Well, that question needs to be unpacked. It
    depends a lot on what--
        Mr. MacArthur. I get it. But it--
        Mr. Schwarcz. --by.
        Mr. MacArthur. --but you are wanting the tail to wag the
    dog, it seems to me.
        Mr. Schwarcz. Well--
        Mr. MacArthur. But let me just ask this. If insurance
    regulators are not really the best regulator for banks, what
    makes you think that the Fed is the bet regulator for an
    insurance company?
        Mr. Schwarcz. Oh, no, I certainly don't. And to be clear,
    current regime doesn't envision, and my understanding is that
    the Fed doesn't actually go and supervise the insurance
    companies. That is not what the Fed is doing. What the Fed is
    doing is supervising the holding company and at a group level.
        Mr. MacArthur. Well--
        Mr. Schwarcz. So they are not actually--there is not--
        Mr. MacArthur. Just one follow up on that, you had
    mentioned AIG as an example numerous times. If this bill had
    been law in 2007--well, that is not fair. If this had been law
    and SIFI designations were also in play, so that would be after
    2007, would AIG be able to skirt or any company be able to
    skirt?
        Mr. Schwarcz. Well, it depends a lot on whether or not they
    were appropriately designated as a SIFI, which, of course, is
    itself an authority that is not being exercised. But absolutely
    there would be a concern about that.
        And I would just point out again because I do think it is
    really important. Even before 2008 savings and loans holding
    companies that were predominantly engaged in insurance had a
    Federal umbrella regulator. This isn't just going back to 2008.
    This is changing the regime that has been in place for decades
    and decades.
        Mr. MacArthur. I have to yield back, but I would just end
    by saying there is still regulation of the bank operation here
    through the OCC. Your belt and suspenders approach comes at a
    cost, a cost to customers, a cost to shareholders and that is
    what we have to weigh. It comes at a real cost.
        I yield back.
        Chairman Duffy. The gentleman yields back.
        I want to thank our witnesses for their testimony today. I
    think it was insightful, thoughtful, and you have all given us
    some more information to think about, which is the purpose of
    an evidentiary hearing like this. So we appreciate your
    testimony and insight.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        Without objection, this hearing is now adjourned.
        [Whereupon, at 11:35 a.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                 March 7, 2018

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