[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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