Tarullo Says Fed Restrained to Bank-Based Approach for Insurers

The Federal Reserve is working to modify a bank-based capital model to cover insurance companies as much as they can under Dodd-Frank Act restraints, Fed Governor Daniel Tarullo told lawmakers at a Senate hearing.

“We’re not in a position to take account of that different business model in setting requirements,” Tarullo, the Fed governor in charge of bank supervision, told Senate Banking Committee members today at a hearing on implementation of the 2010 law. “I can assure you that we’re working as much as we can on tailoring risk weighting for unique insurance products. But we are a little bit confined here.”

Insurance-related holding companies were temporarily left out of capital rules approved by U.S. banking regulators this week. Tarullo said the regulators pushed insurers out of the rule while they continue weighing the best approach.

Insurers have pressed the Fed to avoid bank-like capital rules for firms that may fall within its oversight. Tarullo said the central bank will weigh “unique characteristics” of insurance products while being unable to use different demands for how much capital must be held for specific securities.

MetLife Inc., the largest U.S. life insurer, proposed to the Fed board an alternative that it said is more appropriate for companies designated as systemically important financial institutions, or SIFIs. Prudential Financial Inc., the second- biggest life insurer, has also met with the Fed to discuss capital standards.

The first stage of another rule to deal with risks from banks’ short-term, wholesale funding could emerge “in the early fall,” Tarullo told the lawmakers. The Fed will issue advance language to describe “the way we’re thinking” on how to deal with the financial industry’s reliance on overnight debt, Tarullo said. That reliance proved dangerous when the funding dried up in the 2008 credit crisis.

“The major vulnerability that remains is that associated with large amounts of runnable, short-term funding,” Tarullo said. Large firms depending on the funding may be required to hold more capital, he said last week.

Tarullo and other financial regulators testifying at today’s hearing said Dodd-Frank measures designed to prevent a repeat of the 2008 credit crisis will be largely complete by the end of this year. The Fed will also propose a rule in the fall that financial holding companies hold a minimum amount of long- term debt to help dismantle the firms if they fail, Tarullo said.

“We expect to approach the point of substantial completion of implementation of the Dodd-Frank Act,” Mary Miller, the Treasury Department’s undersecretary for domestic finance, said in remarks prepared for the hearing. “That does not mean we will be able to relax our guard.”

Miller, Tarullo, Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Comptroller of the Currency Thomas Curry were called before the panel to update the status of the 2010 regulatory overhaul. The Fed, FDIC and OCC completed work this week on bank capital rules and proposed a tougher leverage requirement for eight of the largest lenders, including JPMorgan Chase & Co. and Bank of America Corp.

By the end of the year regulators should complete implementation of a risk-based capital surcharge for systemically important banks, a liquidity rule and the Volcker rule to ban proprietary trading by banks, Tarullo said.

Senator Elizabeth Warren, a Massachusetts Democrat, said at the hearing that she would introduce a bill to create a new version of the Glass-Steagall Act, the Depression era law that separated commercial and investment banking. Warren said she is co-sponsoring the legislation with Senators John McCain, an Arizona Republican, Maria Cantwell, a Washington Democrat, and Angus King, a Maine independent who caucuses with the Democrats.

“We propose a 21st century Glass-Steagall so that we can return to the basics and try to keep the gamblers out of our banks,” Warren said.

She also reiterated her call for regulators to make public more enforcement actions against banks. In response to Warren, Tarullo said there may be instances in which making enforcement actions public would be “warranted.”

“I actually do think that the bank regulators need to think more about when we put out the public notice of the kinds of supervisory actions that have been taken,” Tarullo said.
(With assistance from Craig Torres in Washington and Zachary Tracer in New York. Editors: Gregory Mott, Anthony Gnoffo.)