[Federal Register Volume 81, Number 114 (Tuesday, June 14, 2016)]
[Proposed Rules]
[Pages 38631-38637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-14004]


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FEDERAL RESERVE SYSTEM

12 CFR Chapter II

[Docket No. R-1539]
RIN 7100 AE 53


Capital Requirements for Supervised Institutions Significantly 
Engaged in Insurance Activities

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is inviting comment on an advance notice of proposed rulemaking (ANPR) 
regarding approaches to regulatory capital requirements for depository 
institution holding companies significantly engaged in insurance 
activities (insurance depository institution holding companies), and 
nonbank financial companies that the Financial Stability Oversight 
Council (FSOC or Council) has determined will be supervised by the 
Board and that have significant insurance activities (systemically 
important insurance companies). The Board is inviting comment on two 
approaches to consolidated capital requirements for these institutions: 
An approach that uses existing legal entity capital requirements as 
building blocks for insurance depository institution holding companies 
and a simple consolidated approach for systemically important insurance 
companies.

DATES: Comments must be received no later than August 17, 2016.

ADDRESSES: You may submit comments, identified by Docket No. R-1539; 
RIN 7100 AE 53), by any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include Docket 
No. R-1539; RIN 7100 AE 53) in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Robert deV. Frierson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.

All public comments will be made available on the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room 3515, 1801 K Street NW., (between 18th and 19th 
Streets NW.), Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on 
weekdays. For security reasons, the Board requires that visitors make 
an appointment to inspect comments. You may do so by calling (202) 452-
3684. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.

FOR FURTHER INFORMATION CONTACT: Thomas Sullivan, Associate Director, 
(202) 475-7656, Linda Duzick, Manager, (202) 728-5881, or Suyash 
Paliwal, Senior Insurance Policy Analyst, (202) 974-7033, Division of 
Banking Supervision and Regulation; or Laurie Schaffer, Associate 
General Counsel, (202) 452-2272, Benjamin W. McDonough, Special 
Counsel, (202) 452-2036; Tate Wilson, Counsel, (202) 452-369; David 
Alexander, Counsel, (202) 452-2877; or Mary Watkins, Attorney (202) 
452-3722, Legal Division.

SUPPLEMENTARY INFORMATION: 

I. Introduction

A. Background

    Robust capital is an important safeguard to protect the safety and 
soundness of financial institutions; enhance the resilience of 
financial institutions to position them to better navigate periods of 
financial or economic stress; and mitigate threats to financial 
stability that might be posed by the activities, material financial 
distress, or failure of financial institutions. To help achieve these 
benefits, various provisions of Federal law require the Board and other 
Federal banking agencies to establish minimum capital standards for 
holding companies that own insured depository institutions (IDIs) and 
for financial firms that are designated by the FSOC for supervision by 
the Board. The capital standards developed by the Board take into 
account the overall risk profile and the size, scope, and complexity of 
the operations of the institution. Further, the law allows the Board to 
tailor the minimum capital requirements applicable to companies that 
both own an IDI and significantly engage in insurance activities as 
well as for systemically important insurance companies.
    The Board's supervisory objectives in setting capital requirements 
for the consolidated institution focus on the safety and soundness of 
the company and its IDI and on enhancing financial stability, and 
complement the primary mission of state legal entity insurance 
supervisors, which tends to focus on the protection of 
policyholders.\1\ To achieve these objectives, the Board seeks comment 
on several approaches to designing a regulatory capital framework for 
supervised institutions significantly engaged in insurance activities 
that is intended to ensure that the institution has sufficient capital, 
commensurate with its overall institution-wide risk profile (1) to 
absorb losses and continue operations as a going concern throughout 
times of economic, financial, and insurance-related stress (e.g., 
morbidity, mortality, longevity, natural and man-made catastrophes); 
(2) to serve as a source of strength to any subsidiary depository 
institutions; \2\ and (3) to substantially mitigate any threats to 
financial stability that the institution might pose.
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    \1\ For discussion regarding state supervision of insurance, 
see, e.g., Financial Stability Oversight Council, Basis of the 
Financial Stability Oversight Council's Final Determination 
Regarding American International Group, Inc. (July 8, 2013), 
available at https://www.treasury.gov/initiatives/fsoc/designations/Documents/Basis%20of%20Final%20Determination%20Regarding%20American%20International%20Group,%20Inc.pdf; Financial Stability Oversight Council, 
Basis of the Financial Stability Oversight Council's Final 
Determination Regarding Prudential Financial, Inc. (Sept. 19, 2013), 
available at https://www.treasury.gov/initiatives/fsoc/designations/Documents/Prudential%20Financial%20Inc.pdf.
    \2\ 12 U.S.C. 1831o-1. See also, 12 U.S.C. 1844 and Section 706, 
Division O, of the Consolidated Appropriations Act, 2016, Public Law 
114-113, 129 Stat. 2242 (2015).
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B. The Board's Consolidated Supervision of Systemically Important 
Insurance Companies and Insurance Depository Institution Holding 
Companies

    This ANPR seeks comment on proposed approaches to regulatory 
capital requirements that are tailored to the risks of supervised 
insurance institutions, including both insurance depository institution 
holding companies and systemically important insurance companies.
    The Board has broad authority to establish regulatory capital 
standards for

[[Page 38632]]

savings and loan holding companies (SLHCs) and bank holding companies 
(BHCs) \3\ under the Home Owners' Loan Act (HOLA) and Bank Holding 
Company Act, respectively.\4\ The Board's supervisory objectives for 
insurance depository institution holding companies include ensuring the 
safe and sound operation of the consolidated firms and subsidiary IDIs, 
and ensuring that holding companies can serve as a source of strength 
for any subsidiary IDIs.\5\ In addition, certain nonbank financial 
companies with significant insurance activities have been designated by 
the Council pursuant to section 113 of the Dodd-Frank Act \6\ to be 
supervised by the Board and made subject to enhanced prudential 
standards. For these systemically important insurance companies, the 
Board is required under section 165 of the Dodd-Frank Act to establish 
enhanced prudential standards, including more stringent risk-based and 
leverage capital requirements, as well as stress tests.\7\
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    \3\ BHCs that are financial holding companies may engage in 
insurance underwriting activities. 12 U.S.C. 1844(k).
    \4\ 12 U.S.C. 1841 et seq.; 12 U.S.C. 1467a(g).
    \5\ 12 U.S.C. 1831o-1. See also 12 U.S.C. 1467a(g)(5).
    \6\ 12 U.S.C. 5323; see also Basis of the Financial Stability 
Oversight Council's Final Determination Regarding American 
International Group, Inc. (July 8, 2013), available at http://www.treasury.gov/initiatives/fsoc/designations/Documents/Basis%20of%20Final%20Determination%20Regarding%20American%20International%20Group,%20Inc.pdf; Basis for the Financial Stability Oversight 
Council's Final Determination Regarding Prudential Financial, Inc. 
(Sept. 19, 2013), available at http://www.treasury.gov/initiatives/fsoc/designations/Documents/Prudential%20Financial%20Inc.pdf.
    \7\ 12 U.S.C. 5365. Section 165 of the Dodd-Frank Act would also 
direct the Board to establish consolidated capital requirements and 
administer stress test for any insurance depository institution 
holding companies that are BHCs with at least $50 billion in total 
consolidated assets. Presently, there are no BHCs that are also 
insurance depository institution holding companies.
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    With respect to both insurance depository institution holding 
companies and systemically important insurance companies, the Board 
must establish minimum leverage capital requirements and minimum risk-
based capital requirements that apply (1) on a consolidated basis, and 
(2) are at least as stringent as the generally applicable capital 
requirements that applied to IDIs at the time the Dodd-Frank Act was 
adopted, as well as current generally applicable IDI capital 
requirements.\8\ The Dodd-Frank Act has been amended to allow the Board 
to tailor these minimum capital requirements as they would apply to 
persons regulated by state or foreign insurance regulators.\9\
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    \8\ 12 U.S.C. 5371.
    \9\ 12 U.S.C. 5371(c)(1).
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    The Board currently supervises twelve insurance depository 
institution holding companies and two systemically important insurance 
companies. Collectively, these firms have approximately $2 trillion in 
assets and represent approximately one-quarter of the assets of the 
U.S. insurance industry. These institutions range in size from 
approximately $3 billion in total assets to about $700 billion in total 
assets, and engage in a wide variety of insurance and non-insurance 
activities. Some of the firms operate exclusively in the United States, 
and some have material international operations. These institutions 
have a variety of ownership structures, including stock and mutual 
forms of ownership. Some of these institutions prepare financial 
statements according to U.S. Generally Accepted Accounting Principles 
(U.S. GAAP), and some do not, preparing financial statements only 
according to U.S. Statutory Accounting Principles (SAP) filed with 
their relevant state insurance regulators. The insurance depository 
institution holding companies tend to have simpler structures, often 
have an operating company, rather than a holding company, as the top-
tier parent, and have a relatively greater U.S. focus in their 
operations. By contrast, the systemically important insurance companies 
are relatively larger financial institutions with substantial 
international operations, comparatively complex organizational 
structures relative to other insurance companies, and non-insurance as 
well as insurance activities.
    The Board aims to develop regulatory capital frameworks for 
insurance depository institution holding companies and systemically 
important insurance companies that are consistent with the Board's 
supervisory objectives and appropriately tailored to the business of 
insurance. The Board is seeking comment on different frameworks that 
could be applied to insurance depository institution holding companies 
and systemically important insurance companies. As described below, 
this ANPR outlines two conceptual frameworks, one of which may be more 
appropriate for large, complex, systemically important institutions, 
while the other may be more appropriate for generally less complex 
firms such as the current population of insurance depository 
institution holding companies.
    The Board is also seeking comment on the criteria that should be 
used to determine which supervised institutions are subject to 
regulatory capital requirements that are tailored to the business of 
insurance. A supervised insurance institution could become subject to 
tailored regulatory capital rules based on the significance of these 
activities for the consolidated firm. The Board could apply a threshold 
based on a percentage of total consolidated assets attributable to 
insurance activities. For example, for purposes of determining whether 
an SLHC is significantly engaged in insurance activities and should be 
subject to capital requirements that are tailored to these risks, the 
Board is considering using the threshold in the Board's existing 
capital requirements (Regulation Q).\10\ Under this approach, an SLHC 
would be subject to the capital requirements as an insurance SLHC if it 
held 25 percent or more of its total consolidated assets in insurance 
underwriting subsidiaries (other than assets associated with insurance 
underwriting for credit risk).\11\ Further, the Board could define 
systemically important insurance companies as FSOC-designated nonbank 
financial companies with at least 40 percent of total consolidated 
assets related to insurance activities (as of the end of either of the 
two most recently completed fiscal years), or as otherwise ordered by 
the Board. These thresholds could reflect a level of insurance activity 
that is significant rather than incidental to the institution's 
activities.
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    \10\ 12 CFR 217.2.
    \11\ 12 CFR 217.2. Depository institution holding companies 
comprise BHCs as well as SLHCs. Presently, the population of Board-
supervised insurance depository institution holding companies 
includes 12 SLHCs significantly engaged in insurance activities. To 
the extent that a BHC met the definition of an insurance depository 
institution holding company, the Board would need to consider 
whether to exclude the BHC from the Board's Regulation Q and instead 
apply a different approach.
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    The Board invites comment on all aspects of these frameworks, 
including whether these frameworks are workable, would enhance the 
resilience of these institutions, and would reduce risks to financial 
stability. The Board also invites comment and suggestions on other 
frameworks that may better achieve these purposes. In addition, the 
Board invites comment on the costs and benefits of these and alternate 
approaches, and on the various advantages and difficulties of each 
approach. To help the Board address specific issues raised by the 
regulatory capital frameworks discussed below, the Board also invites 
comment on the

[[Page 38633]]

specific questions listed throughout this notice.

II. Consolidated Capital Frameworks for Supervised Institutions 
Significantly Engaged in Insurance Activities: Two Options

    In developing and evaluating potential capital frameworks, the 
Board relied on its experience in supervision of financial firms and 
with the development and application of capital standards through 
normal and stressed periods; discussions with affected financial firms, 
including firms engaged in insurance activities; the purposes of and 
requirements in Federal law; and information and insights provided by 
other supervisors, including state insurance supervisors, among other 
things.
    Insurance supervisors, insurance companies and others have argued 
that because liability structures, asset classes, and asset-liability 
matching of insurance companies differ markedly from those of a typical 
BHC, the capital framework (or frameworks) should be tailored to the 
business mix and risk profile of insurance depository institution 
holding companies and systemically important insurance companies. They 
have also contended that leverage limits based on the ratio of equity 
to total assets, which are an important backstop in a banking 
regulatory capital framework, may have less value as a risk metric for 
supervised institutions significantly engaged in insurance activities 
because they do not address the different liability structure that is 
inherent to the insurance business. The Board has flexibility to 
develop leverage and risk-based capital requirements that are tailored 
to appropriately reflect the risks of supervised institutions 
significantly engaged in insurance activities.\12\
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    \12\ See Insurance Capital Standards Clarification Act of 2014, 
Public Law 113-279, 128 Stat. 3017 (2014).
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    At the same time, supervisors and commenters recognize that a 
capital framework also should take into account all material risk types 
(insurance and non-insurance) in these institutions. Capital standards 
that do not account for all types of material risks tend to be 
ineffective and incent riskier activity. In addition, to the greatest 
extent possible, the capital framework should take account of risks 
across the entire firm--in the holding company, in regulated 
subsidiaries, and in unregulated subsidiaries. The financial crisis 
demonstrated that risks of financial distress often spread across an 
organization from unregulated subsidiaries to regulated 
subsidiaries.\13\ Moreover, the framework should be as standardized as 
possible, rather than relying predominantly on a firm's internal 
capital models. Greater standardization will produce more consistent 
capital requirements, enhance comparability across firms, and promote 
greater transparency.\14\
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    \13\ For example, severe losses in non-insurance subsidiaries 
may undermine confidence in an entire insurance organization and 
contribute to a firm's inability to meet obligations. Board of 
Governors of the Federal Reserve System, Regulatory Reform, American 
International Group (AIG), Maiden Lane II and III, available at 
https://www.federalreserve.gov/newsevents/reform_aig.htm.
    \14\ Actuarial models, as opposed to asset risk-weighting 
models, are nonetheless important in setting insurance reserves.
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    The capital framework also should be based on U.S. regulatory and 
accounting standards and not foreign regulatory and accounting 
standards in order to best meet the needs of the U.S. financial system 
and insurance markets while reflecting the risks inherent in the 
business of insurance. The framework should strike a reasonable balance 
between simplicity and risk sensitivity. Achieving this balance will 
help ensure that risks are accurately captured while minimizing 
regulatory burden and increasing comparability and transparency across 
firms. The framework also should be executable in the short-to-medium 
term. Finally, the framework should contribute to the stability of the 
financial system and should serve as a good basis for a supervisory 
stress test regime to the extent these provisions apply to the 
regulated firm.
    The Board invites comment on the considerations that should guide 
the development of a regulatory capital framework for insurance 
depository institution holding companies and systemically important 
insurance companies.

    Question 1. Are these identified considerations appropriate? Are 
there other considerations the Board should incorporate in its 
evaluation of capital frameworks for supervised institutions 
significantly engaged in insurance activities?
    Question 2. Should the same capital framework apply to all 
supervised insurance institutions?
    Question 3. What criteria should the Board use to determine 
whether a supervised insurance institution should be subject to 
regulatory capital rules tailored to the business of insurance?
    Question 4. If multiple capital frameworks are used, what 
criteria should be used to determine whether a supervised insurance 
institution should be subject to each framework?
    Question 5. In addition to insurance underwriting activities, 
what other activities, if any, should be used to determine whether a 
supervised institution is significantly engaged in insurance 
activities and should be subject to regulatory capital requirements 
tailored to the business mix and risk profile of insurance?

    The remainder of this section will describe two potential 
regulatory capital frameworks for supervised institutions significantly 
engaged in insurance activities; discuss the strengths and weaknesses 
of each approach; and suggest ways in which each approach could be 
effectively applied. The Board invites comment on all aspects of each 
approach. The Board will then use these comments to develop a specific 
proposal, likely based on these two approaches, and invite public 
comment on that specific proposal.

A. Option 1: Building Block Approach

    The Board has traditionally set capital requirements for holding 
companies on a consolidated basis.\15\ Among other things, a 
consolidated capital standard deters firms from placing assets in a 
particular legal entity, where the assets may be subject to lower, or 
no, capital requirements. Many SLHCs that are supervised insurance 
institutions because they own depository institutions do not produce 
consolidated financial statements.\16\ This presents potential 
challenges to the development of consolidated capital requirements that 
would not impose undue burden on these institutions.
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    \15\ See 12 CFR part 217.
    \16\ Section 171(c)(3) of the Dodd-Frank Act, as amended, 
prohibits the Board from requiring, pursuant to the Dodd-Frank Act 
or HOLA, supervised institutions that only prepare financial 
statements in accordance with SAP to prepare financial statements in 
accordance with U.S. GAAP. 12 U.S.C. 5371(c)(3)(A)-(B).
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    One approach that would accommodate this would aggregate capital 
resources and capital requirements across the different legal entities 
in the group to calculate combined qualifying and required capital. A 
firm's aggregate capital requirements generally would be the sum of the 
capital requirements at each subsidiary. This is a building block 
approach (BBA). The capital requirement for each regulated insurance or 
depository institution subsidiary would be based on the regulatory 
capital rules of that subsidiary's functional regulator--whether a 
state or foreign insurance regulator for insurance subsidiaries or a 
federal banking regulator for IDIs. The BBA would then build upon and 
aggregate legal entity (insurance, non-insurance financial, non-
financial, and holding company) qualifying capital

[[Page 38634]]

and required capital, subject to adjustments.
    Under this approach, the regulatory capital requirements for a 
regulated insurance underwriting firm would be determined by reference 
to the rules of the appropriate state or foreign insurance supervisor 
for the firm. The regulatory capital requirement for each IDI generally 
would be determined under the Board's Regulation Q or under other 
capital rules applicable to IDIs.\17\ The regulatory capital 
requirement for any other regulated non-insurance or unregulated 
subsidiary legal entity, such as a mid-tier holding company, would also 
be determined under the Board's Regulation Q.
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    \17\ 12 CFR part 217.
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    As discussed further below, BBA may require the use of several 
types of adjustments in the calculation of a firm's enterprise-wide 
capital requirement. Adjustments may be necessary to conform or 
standardize the accounting practices under SAP among U.S. 
jurisdictions, and between SAP and foreign jurisdictions. Similarly, 
adjustments may be necessary to eliminate inter-company transactions.
    Additionally, the BBA may require consideration of cross-
jurisdictional differences. As discussed below, this would be achieved 
through the use of scalars. Scalars may, for example, be appropriate to 
account for differences in stringency applied by different insurance 
supervisors, and to ensure adequate reflection of the safety and 
soundness and financial stability goals, as opposed to policyholder 
protection, that the Board is charged with achieving.
    The ratio of aggregate qualifying capital to aggregate required 
capital would represent capital adequacy at a consolidated level. 
Represented in an equation, the BBA could be summarized as follows:
[GRAPHIC] [TIFF OMITTED] TP14JN16.000

    Question 6. What are the advantages and disadvantages of 
applying the BBA to the businesses and risks of supervised 
institutions significantly engaged in insurance activities?
    Question 7. What challenges and benefits do you foresee to the 
development, implementation, or application of the BBA? To what 
extent would the BBA utilize existing records, data requirements, 
and systems, and to what extent would the BBA require additional 
records, data, or systems? How readily could the BBA's calculations 
be performed across a supervised institution's subsidiaries and 
affiliates within and outside of the United States?
    Question 8. What scalars and adjustments are appropriate to 
implement the BBA, and make the BBA effective in helping to ensure 
resiliency of the firm and comparability among firms, while 
minimizing regulatory burden and incentives and opportunity to evade 
the requirements?
    Question 9. To what extent is the BBA prone to regulatory 
arbitrage?
    Question 10. Which jurisdictions or capital regimes would pose 
the greatest challenges to inclusion in the BBA?
    Question 11. How should the BBA apply to a supervised 
institution significantly engaged in insurance activity where the 
ultimate parent company is an insurer that is also regulated by a 
state insurance regulator? Are there other organizational structures 
that could present challenges?

    The key strengths of the BBA include the following: (1) It 
efficiently uses existing legal-entity-level regulatory capital 
frameworks; (2) it is an approach that could be developed and 
implemented expeditiously; (3) it would involve relatively low 
regulatory costs and burdens for the institutions; and (4) it would 
produce regulatory capital requirements that are tailored to the risks 
of each distinct jurisdiction and line of business of the institution.
    The key weaknesses of the BBA include: (1) At the top-tier level, 
it is an aggregated, but not a consolidated, capital framework; (2) it 
would not discourage regulatory arbitrage within an institution due to 
inconsistencies across jurisdictional capital requirements and also may 
be vulnerable to gaming through techniques such as double leverage 
(i.e., when an upstream entity issues debt to acquire an equity stake 
in a downstream entity); (3) it would need to account for inter-company 
transactions, which may result in extensive adjustments; (4) it would 
require the Board to determine scalars regarding a large number of 
state and foreign insurance regulatory capital regimes; and (5) it 
likely would require legal-entity-level stress tests, presenting 
challenges to appropriate reflection of diversification and inter-
company risk transfer mechanisms and other transactions.
    The strengths of the BBA would appear to be maximized and its 
weakness minimized were the BBA to be applied to insurance depository 
institution holding companies, which generally are less complex, less 
international, and not systemically important. In this context, 
incremental safety and soundness benefits would appear to be 
complemented by the lower compliance costs due to the smaller number of 
scalars involved. In particular, the BBA is standardized, executable, 
applies U.S.-based accounting principles for U.S. legal entities, 
accounts for material insurance risks, strikes a balance between risk-
sensitivity and simplicity, and is well-tailored to the business model 
and risks of insurance.\18\
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    \18\ In addition, the BBA could be implemented in a manner 
consistent with section 171(c)(3) of the Dodd-Frank Act.
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    For the systemically important insurance companies, the BBA may not 
capture the full set of risks these firms impose on the financial 
system without significant use of adjustments and scalars, thereby 
negating any potential burden reduction from the approach. These firms 
also tend to prepare financial statements under U.S. GAAP, thereby 
making a consolidated capital requirement less burdensome to compute. 
Accordingly, the BBA may not be appropriate for systemically important 
insurance companies.
    The Board continues to analyze whether the BBA is appropriate as a 
regulatory capital framework and whether it may be appropriate for all 
insurance depository institution holding companies or only a subset of 
these firms. Specifically, the Board is considering whether larger or 
more complex insurance depository institution holding companies should 
be subject to a regulatory capital framework other than the BBA.

    Question 12. Is the BBA an appropriate framework for insurance 
depository institution holding companies? How effective is the BBA 
at achieving the goal of ensuring the safety and soundness of an 
insurance depository institution holding company?
    Question 13. Would the BBA be appropriate for larger or more 
complex insurance companies that might in the future acquire a 
depository institution?

    Further, the Board seeks comment on the following key issues 
regarding the design and implementation of the BBA.

[[Page 38635]]

    Baseline capital requirements at the legal-entity level. The BBA 
framework would begin with the baseline capital requirements at each 
legal entity. For example, for state-regulated insurance entities, the 
BBA could use different triggering thresholds from the state risk-based 
capital framework (e.g., the Company Action Level, the Authorized 
Control Level), or some other level as the appropriate baseline capital 
requirement. For some regulated foreign insurance entities, the Board 
would need to decide whether the local minimum capital requirement, 
prescribed capital requirement, or some other requirement is the 
appropriate baseline. For subsidiary IDIs, the BBA could use the 
minimum common equity tier 1, tier 1, or total risk-based capital 
requirements under the standardized approach in the Board's Regulation 
Q, as well as the tier 1 leverage ratio. For unregulated subsidiaries, 
the BBA could use the risk-based capital or leverage requirements for 
depository institutions or some other, similarly stringent approach.

    Question 14. In applying the BBA, what baseline capital 
requirement should the Board use for insurance entities, banking 
entities, and unregulated entities?

    State-by-state and international variances in accounting or capital 
treatment for supervised institutions significantly engaged in 
insurance activities. The accounting practices for insurance companies 
can vary from state to state due to permitted and prescribed practices, 
and can result in significant differences in financial statements 
between similar entities filing SAP financial statements in different 
states. Regulators both within and outside of the U.S. have the 
authority to take actions with respect to insurance companies that may 
result in variances from standard accounting practices. The BBA would 
need to address international or state regulator approved variances in 
accounting or capital requirements for regulated insurance entities.

    Question 15. How should the BBA account for international or 
state regulator approved variances to accounting rules?
    Question 16. What are the challenges in using financial data 
under different accounting frameworks? What adjustments and/or 
eliminations should be made to ensure comparability when aggregating 
to an institution-wide level?
    Question 17. What approaches or strategies could the Board use 
to calibrate the various capital regimes without needing to make 
adjustments to the underlying accounting?

    Inter-company transactions. Any approach to regulatory capital for 
a supervised institution significantly engaged in insurance activities 
that aggregates qualifying capital and required capital at different 
legal entities within the institution should address inter-company 
transactions. Although inter-company transactions are naturally 
eliminated in consolidated accounting and regulatory frameworks, in an 
aggregated framework like the BBA, some inter-company transactions 
could generate redundancies in capital requirements, while others could 
reduce the required capital of a legal entity without reducing the 
overall risk profile of the institution. The BBA should include a 
treatment for inter-company transactions between different legal 
entities in the same supervised institution.

    Question 18. How should the BBA address inter-company 
transactions?

    Scalars. An important component of the BBA is that scalars would 
serve to bring jurisdictional capital frameworks to comparable levels 
of supervisory stringency. The BBA would need an appropriate scalar for 
each local regulatory capital regime, and therefore also would need a 
set of principles for determining those scalars. Any necessary scalars 
would be designed to reflect differences in supervisory purposes 
appropriate for insurance.

    Question 19. What criteria should be used to develop scalars for 
jurisdictions? What benefits or challenges are created through the 
use of scalars?

    Consolidation of qualifying capital. Under one version of a BBA 
framework, an insurance depository institution holding company or 
systemically important insurance company generally would determine its 
aggregate qualifying capital position by summing the qualifying capital 
position at each of its legal entities. A weakness of this approach is 
that it could enable the supervised institution to engage in 
substantial double leverage--that is, the institution's top-tier legal 
entity could fund its equity investments in its subsidiaries by 
substantial borrowings. Such an institution could have substantial 
qualifying capital positions at each of its major subsidiaries (and 
thus a robust BBA capital ratio) but could have a weak consolidated 
capital position.
    To address this limitation of a simple BBA, the Board is 
considering adopting a version of the BBA that would determine an 
institution's aggregate qualifying capital position on a uniform, 
consolidated basis. Under such an approach, the BBA would continue to 
draw upon capital requirements set by the local regulators of each 
legal entity, but would use a single definition of qualifying capital 
for supervised institutions and would apply that definition to the 
institution on a fully consolidated basis. To implement this version of 
the BBA, the Board would need to develop a definition of consolidated 
regulatory capital for supervised institutions significantly engaged in 
insurance activities, including rules to address minority interests.

    Question 20. What are the costs and benefits of a uniform, 
consolidated definition of qualifying capital in the BBA?
    Question 21. If the Board were to adopt a version of the BBA 
that employs a uniform, consolidated definition of qualifying 
capital, what criteria should the Board consider? What elements 
should be treated as qualifying capital under the BBA?
    Question 22. Should the Board categorize qualifying capital into 
multiple tiers, such as the approach used in the Board's Regulation 
Q? If so, what factors should the Board consider in determining 
tiers of qualifying capital for supervised institutions 
significantly engaged in insurance activities under the BBA?

B. Option 2: Consolidated Approach

    The Board is also considering a consolidated approach (CA) to 
capital with risk segments and factors appropriate for supervised 
insurance institutions.
    The CA is a proposed capital framework for supervised institutions 
significantly engaged in insurance activities that would categorize 
insurance liabilities, assets, and certain other exposures into risk 
segments; determine consolidated required capital by applying risk 
factors to the amounts in each segment; define qualifying capital for 
the consolidated firm; and then compare consolidated qualifying capital 
to consolidated required capital. Unlike the BBA, which fundamentally 
aggregates legal-entity-level qualifying capital and required capital, 
the CA would take a fully consolidated approach to qualifying capital 
and required capital. As distinguished from the Board's consolidated 
capital requirements for bank holding companies, the CA would use risk 
weights and risk factors that are appropriate for the longer-term 
nature of most insurance liabilities.
    The foundation of the CA, for systemically important insurance 
companies, would be consolidated financial information based on U.S. 
GAAP, with adjustments for regulatory purposes. Application of the CA 
to insurance depository institution holding companies that do not file 
U.S. GAAP financial statements would require the development of a 
consolidated approach based on SAP. Initially, the CA could be

[[Page 38636]]

simple in design, with broad risk segmentation, but could evolve over 
time to have an increasingly granular segmentation approach with 
greater risk sensitivity. Represented as an equation, the CA could be 
summarized as follows:
[GRAPHIC] [TIFF OMITTED] TP14JN16.001

    Question 23. What are the advantages and disadvantages of 
applying the CA to the businesses and risks of supervised 
institutions significantly engaged in insurance activities?
    Question 24. What are the likely challenges and benefits to the 
development, implementation, and application of the CA? To what 
extent could the CA efficiently use existing records, data 
requirements, and systems, and to what extent would the CA require 
additional records, data, or systems?
    Question 25. To what extent would the CA be prone to regulatory 
arbitrage?

    The CA has strengths and weaknesses as a regulatory capital 
framework. The key strengths of the CA include the following: (1) It 
has a simple and transparent factor-based design; (2) it covers all 
material risks of supervised institutions significantly engaged in 
insurance activities; (3) it is a fully consolidated framework that has 
the potential to reduce regulatory arbitrage opportunities and the risk 
of double leverage; (4) it would be relatively expeditious for the 
Board to develop and for institutions to implement, particularly in 
light of its broad risk segmentation as implemented initially; and (5) 
it would provide a solid basis upon which to build consolidated 
supervisory stress tests of capital adequacy for institutions subject 
to stress testing requirements.
    The key weaknesses of the CA include the following: (1) The 
initially simple design of the CA would result in relatively crude risk 
segments and thus limited risk sensitivity, and (2) substantial 
analysis would be needed to design a set of risk factors for all the 
major segments of assets and insurance liabilities of supervised 
institutions significantly engaged in insurance activities. In 
addition, a separate SAP-based version of the CA would need to be 
developed for the insurance depository institution holding company 
population if CA were ever applied to an insurance depository 
institution holding company that only uses SAP.
    Based on the Board's initial analysis of the CA's strengths and 
weaknesses and comparing the CA against the considerations set forth 
above, it appears that the CA may be an appropriate regulatory capital 
framework for systemically important insurance companies. The CA, as a 
consolidated capital framework, would reduce the opportunity for 
regulatory arbitrage and the potential for double leverage. The CA also 
would more easily enable supervisory stress testing and other 
macroprudential features for systemically important insurance 
companies.
    The advantages of the CA are most salient for systemically 
important insurance companies that, by definition, are large, and 
internally and externally complex institutions. For insurance 
depository institution holding companies, which generally are smaller 
and less complex, these benefits may be outweighed by the additional 
implementation costs.

    Question 26. Is the CA an appropriate framework to be applied to 
systemically important insurance companies? What are the key 
challenges to applying the CA to systemically important insurance 
companies? How effective would the CA be at achieving the goals of 
ensuring the safety and soundness of a systemically important 
insurance company as well as minimizing the risk of a systemically 
important insurance company's failure or financial distress on 
financial stability?
    Question 27. What should the Board consider in determining more 
stringent capital requirements to address systemic risk? Should 
these requirements be reflected through qualifying capital, required 
capital, or both?

    Further, the Board seeks comment on the following key issues 
regarding the design and implementation of the CA.
    Definition of qualifying capital. Implementation of the CA would 
require the development of a uniform, consolidated definition of 
qualifying capital that is appropriate for all institutions subject to 
the CA.

    Question 28. What should the Board consider in developing a 
definition of qualifying capital under the CA? What elements should 
be treated as qualifying capital under the CA?
    Question 29. For purposes of the CA, should the Board categorize 
qualifying capital into multiple tiers? What criteria should the 
Board consider in determining tiers of qualifying capital for 
supervised institutions significantly engaged in insurance 
activities under the CA?

    Segmentation of exposures. Implementing the CA would require a 
framework for segmenting or disaggregating balance-sheet assets, 
balance-sheet insurance liabilities, and certain off-balance-sheet 
exposures. Appropriate segmentation would be important to ensure that 
similar risks face broadly similar capital requirements and that the 
capital regime produces an appropriate degree of risk sensitivity while 
minimizing the opportunities for regulatory arbitrage. This 
segmentation process would account for differences among insurance 
risks as well as between insurance risks and banking and other non-
insurance, financial risks. While the initial version of the CA likely 
would have broad risk segments, the CA could evolve over time to become 
more risk sensitive. One option for implementing the CA for 
systemically important insurance companies would be to use the 
segmentation framework in the Board's proposed Consolidated Financial 
Statements for Insurance Systemically Important Financial 
Institutions.\19\
---------------------------------------------------------------------------

    \19\ 81 FR 24097 (Apr. 25, 2016).

    Question 30. What risk segmentation should be used in the CA? 
What criteria should the Board consider in determining the risk 
segments? What criteria should the Board consider in determining how 
granular or risk sensitive the segmentation should be?
    Question 31. What challenges does U.S. GAAP present as a basis 
for segmentation in the CA?
    Question 32. What are the pros and cons of using the risk 
segmentation framework in the proposed Consolidated Financial 
Statements for Insurance Systemically Important Financial 
Institutions as the basis of risk segmentation for the CA?

    Exposure amounts. The CA would need to identify the exposure 
amounts of the various kinds of balance-sheet assets, balance-sheet 
insurance liabilities, and off-balance-sheet exposures of an 
institution. Although in many cases, the reported amount of a 
particular exposure may be appropriate for purposes of the CA, in other 
cases the financial information of an institution may require 
adjustments. For example, adjusting insurance liabilities may be 
necessary in order to include additional, relevant information, such as 
current assumptions, or to better match the valuation of related 
assets. Further, the CA would require the determination of the 
appropriate exposure amounts for derivatives and other off-balance-
sheet items in order to accurately reflect the risk exposure in 
determining required capital.


[[Page 38637]]


    Question 33. How should the CA reflect off-balance-sheet 
exposures?
    Question 34. Under what circumstances should U.S. GAAP be used 
or adjusted to determine the exposure amount of insurance 
liabilities under the CA?

    Factors. The CA would involve a set of Board-determined factors to 
be applied to the exposure amounts of assets, insurance liabilities, 
and off-balance-sheet items in each risk segment. The factor for each 
risk segment would reflect the riskiness of the segment and the capital 
required to support that risk. Because of the different liability 
structures between insurance companies and banks, some of the 
applicable insurance risk factors may differ from the analogous risk 
factors that apply to banks.

    Question 35. What considerations should the Board apply in 
determining the various factors to be applied to the amounts in the 
risk segments in the CA?
    Question 36. What challenges are there in determining risk 
factors for global risks?

    Minimum ratio. The CA would require the establishment of a minimum 
ratio of consolidated qualifying capital to consolidated factor-
weighted exposures in the CA. In addition, one or more definitions of 
capital adequacy (e.g., ``well capitalized'' or ``adequately 
capitalized'') would be needed for early remediation and other 
supervisory purposes.
    Question 37. What criteria should the Board consider in 
developing the minimum capital ratio under the CA and definitions of 
a ``well-capitalized'' or ``adequately capitalized'' insurance 
institution?

C. Other Assessed Frameworks

    In developing the two general approaches discussed here, the Board 
considered a number of other potential regulatory capital frameworks 
that did not appear to meet the Board's supervisory objectives for 
supervised institutions significantly engaged in insurance activities. 
For example, consideration was given to applying a risk-based capital 
rule that is based solely on the Board's existing capital requirements 
for banking organizations (Regulation Q) to supervised institutions 
significantly engaged in insurance activities. Such an approach would 
not recognize the unique risks, regulation, and balance sheet 
composition of insurance firms. Although bank-like capital requirements 
may be appropriate for exposures that a supervised institution 
significantly engaged in insurance activities holds in a non-insurance 
subsidiary, an approach based solely on the Board's Regulation Q would 
not capture significant insurance risks. The Board is not aware of any 
major country that imposes bank capital requirements on insurance 
firms.
    The Board also reviewed an approach that entirely excluded 
insurance subsidiaries and applied capital requirements only to the 
non-insurance parts of the supervised firm. This approach would, by 
definition, not capture all the material risks of the organization. 
While section 171 of the Dodd-Frank Act, as amended, permits the Board 
to exclude state and foreign regulated insurance entities in 
establishing minimum consolidated leverage and risk-based capital 
requirements, the parent holding company should be a source of capital 
strength to the entire entity, including to the subsidiary insurance 
companies and IDIs. To do this effectively, a consolidated capital 
requirement must take into account the risks within the consolidated 
organization, including insurance risks.
    A capital approach based on the European Solvency II framework was 
considered, but would not appear to be appropriate for systemically 
important insurance companies and insurance depository institution 
holding companies in the United States.\20\ Use of a Solvency II-based 
capital framework would not adequately account for U.S. GAAP and may 
introduce excessive volatility due to discount rate assumptions. 
Moreover, use of a Solvency II-based approach would involve excessive 
reliance on internal models. Internal models make cross-firm 
comparisons difficult and can lack transparency to supervisors and 
market participants. Additionally, such an approach would not be 
executable in the short-to-medium term; the notable challenges of the 
Solvency II regime have resulted in significantly extended 
implementation periods in various European jurisdictions.
---------------------------------------------------------------------------

    \20\ See Council Directive 2009/138, On the Taking-Up and 
Pursuit of the Buisness of Insurance and Reinsurance (Solvency II), 
2009 O.J. (L 335) 1 (EC).
---------------------------------------------------------------------------

    The Board also analyzed a potential regulatory capital framework 
for supervised institutions significantly engaged in insurance 
activities that is based on internal stress testing. This approach 
would rely on internal models, be highly novel and complex, would 
entail a large and lengthy construction project, and would require a 
substantial dedication of supervisory resources to superintend. The 
Board intends to continue exploration of internal stress testing as it 
builds its supervisory stress testing program for systemically 
important insurance companies and its broader supervision program for 
supervised institutions significantly engaged in insurance activities.

    Question 38. Should the Board reevaluate any of these 
approaches? What additional consideration, if any, should the Board 
give to any of the regulatory capital approaches discussed above?

III. Conclusion

    The Board is seeking information on all aspects of its approaches 
to insurance regulatory capital and invites comment on the appropriate 
consolidated capital requirements for systemically important insurance 
companies and insurance depository institution holding companies. In 
addition, the Board invites comment on all of the questions set forth 
in this ANPR, as well as other issues that commenters may wish to 
raise.
    In connection with this ANPR, the Board will review all comments 
submitted and supplementary information provided, as well as 
information regarding insurance regulatory capital derived from the 
Board's regulatory and supervisory activities. Once the Board has 
completed its review, the Board anticipates that it will issue a notice 
of proposed rulemaking to establish a regulatory capital framework for 
supervised institutions significantly engaged in insurance activities.

    By order of the Board of Governors of the Federal Reserve 
System, June 9, 2016.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016-14004 Filed 6-13-16; 8:45 am]
 BILLING CODE 6210-01-P