Senate Legislation Would Clarify Dodd-Frank Leverage and Risk-Based Requirements

Senator Susan Collins (R-ME) has introduced legislation, S. 2102, that would clarify the leverage and risk-based requirements of the Dodd-Frank Act. Senator Collins is the author of Section 171 of Dodd-Frank, which is aimed at addressing the too big to fail problem by requiring large financial holding companies to maintain a level of capital at least as high as that required for community banks, equalizing their minimum capital requirements, and eliminating the incentive for financial institutions to become too big to fail. Section 171 allows the federal regulators to take into account the distinctions between banking and insurance, and the implications of those distinctions for capital adequacy. While it is essential that insurers subject to Federal Reserve Board oversight be adequately capitalized on a consolidated basis, noted Senator Collins in recent testimony before the Senate Subcommittee on Financial Institutions, it would be improper, and not in keeping with Congressional intent, for federal regulators to supplant prudential state-based insurance regulation with a bank-centric capital regime for insurance activities. Indeed, she affirmed that nothing in Section 171 alters state capital requirements for insurance companies under state regulation. The Collins legislation would add language to Section 171 to clarify that, in establishing minimum capital requirements for holding companies on a consolidated basis, the Federal Reserve is not required to include insurers so long as the insurers are engaged in activities regulated as insurance at the state level. The legislation also provides a mechanism for the Federal Reserve, acting in consultation with the appropriate state insurance authority, to provide similar treatment for foreign insurance entities within a U.S. holding company where that entity does not itself do business in the United States. In her testimony, Senator Collins pointed out that does not, in any way, modify or supersede any other provision of law upon which the Federal Reserve may rely to set appropriate holding company capital requirements.