[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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