Rule2023-23911
Regulatory Capital Rules: Risk-Based Capital Requirements for Depository Institution Holding Companies Significantly Engaged in Insurance Activities
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 27, 2023
Effective
January 1, 2024
Issuing agencies
Federal Reserve System
Abstract
The Board of Governors of the Federal Reserve System is adopting risk-based capital requirements for depository institution holding companies that are significantly engaged in insurance activities. This risk-based capital framework, termed the Building Block Approach, adjusts and aggregates existing legal entity capital requirements to determine enterprise-wide capital requirements. The final rule also contains a risk-based capital requirement excluding insurance activities, in compliance with section 171 of The Dodd-Frank Wall Street Reform and Consumer Protection Act. The Board also is adopting a reporting form FR Q-1 related to the Building Block Approach. The capital requirements and associated reporting form meet statutory mandates and will help to prevent the economic and consumer impacts resulting from the failure of organizations engaged in banking and insurance.
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[Federal Register Volume 88, Number 226 (Monday, November 27, 2023)]
[Rules and Regulations]
[Pages 82950-82980]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-23911]
[[Page 82949]]
Vol. 88
Monday,
No. 226
November 27, 2023
Part II
Federal Reserve System
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12 CFR Parts 217, 238, and 252
Regulatory Capital Rules: Risk-Based Capital Requirements for
Depository Institution Holding Companies Significantly Engaged in
Insurance Activities; Final Rule
Federal Register / Vol. 88 , No. 226 / Monday, November 27, 2023 /
Rules and Regulations
[[Page 82950]]
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FEDERAL RESERVE SYSTEM
12 CFR Parts 217, 238, and 252
[Docket No. R-1673]
RIN 7100-AF56
Regulatory Capital Rules: Risk-Based Capital Requirements for
Depository Institution Holding Companies Significantly Engaged in
Insurance Activities
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board of Governors of the Federal Reserve System is
adopting risk-based capital requirements for depository institution
holding companies that are significantly engaged in insurance
activities. This risk-based capital framework, termed the Building
Block Approach, adjusts and aggregates existing legal entity capital
requirements to determine enterprise-wide capital requirements. The
final rule also contains a risk-based capital requirement excluding
insurance activities, in compliance with section 171 of The Dodd-Frank
Wall Street Reform and Consumer Protection Act. The Board also is
adopting a reporting form FR Q-1 related to the Building Block
Approach. The capital requirements and associated reporting form meet
statutory mandates and will help to prevent the economic and consumer
impacts resulting from the failure of organizations engaged in banking
and insurance.
DATES: This rule is effective on January 1, 2024.
FOR FURTHER INFORMATION CONTACT: Lara Lylozian, Deputy Associate
Director and Chief Accountant, (202) 475-6656; Matt Walker, Manager,
Insurance Supervision & Regulation, (202) 872-4971; or John Muska, Lead
Insurance Policy Analyst, (202) 384-7278; Division of Supervision and
Regulation; or Dafina Stewart, Assistant General Counsel, (202) 452-
2677; Andrew Hartlage, Special Counsel, (202) 452-6483; Jonah Kind,
Senior Counsel, (202) 452-2045; or Jasmin Keskinen, Attorney, (202)
475-6650, Legal Division, Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue NW, Washington, DC 20551.
For users of TTY-TRS, please call 711 from any telephone, anywhere in
the United States.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Background
B. Description of the Building Block Approach
C. Summary of Comments Received on the NPR and Form FR Q-1
D. Main Changes in the Final Rule and Form FR Q-1
II. Effective Date and Scope
A. Scope
B. Effective Date
III. Dodd-Frank Act Capital Calculation
IV. Minimum Capital Requirement and Capital Conservation Buffer
V. Determination of Building Blocks and Related Issues
A. Inventory
B. Identifying Capital Frameworks for Each Inventory Company
C. Identification of Building Block Parents
D. Material Financial Entity
E. Treatment of Asset Managers
VI. Adjustments
A. Capital Instruments
B. Adjustments for Comparability
C. Title Insurance Issues
VII. Title Insurance Reserves
VIII. Title Plant Assets
IX. Scaling
X. Aggregation
XI. Reporting
A. Submission Date
B. Public Disclosure
C. Audit Requirements
XII. Economic Impact Analysis of the BBA
XIII. Administrative Law Matters
A. Paperwork Reduction Act
B. Regulatory Flexibility Act
C. Plain Language
I. Introduction
The Board of Governors of the Federal Reserve System (Board) is
adopting a rule that establishes minimum risk-based capital
requirements for certain depository institution holding companies
significantly engaged in insurance activities (insurance depository
institution holding companies). The rule establishes an enterprise-wide
risk-based capital framework, termed the ``building block'' approach
(BBA), that incorporates legal entity capital requirements such as the
requirements prescribed by state insurance regulators, taking into
account differences between the business of insurance and banking.
This final rule follows the issuance of two documents for comment
by the Board. The first was the 2016 advance notice of proposed
rulemaking (ANPR), in which the Board described the concept of the BBA
as a capital framework and sought input on all aspects of its
development at an early stage.\1\ The Board considered this feedback
and invited comment on a detailed BBA proposal in the notice of
proposed rulemaking (NPR or proposal) issued in September 2019.\2\ The
NPR would have established risk-based capital requirements for
insurance depository institution holding companies. As discussed in
that proposal, insurance depository institution holding companies
include depository institution holding companies that are insurance
underwriting companies and depository institution holding companies
that hold a significant percentage of total assets in insurance
underwriting subsidiaries. In addition to the enterprise-wide capital
requirement for insurance depository institution holding companies
based on the BBA framework, the proposal would have applied a minimum
risk-based capital requirement to the enterprise using the flexibility
afforded under amendments enacted in 2014 to section 171 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
to exclude certain state- and foreign-regulated insurance operations
(section 171 calculation).\3\ The proposal included a buffer
requirement that would have limited an insurance depository institution
holding company's capital distributions and discretionary bonus
payments if it did not hold sufficient capital relative to enterprise-
wide risk, including risk from insurance activities. The proposed rule
would have relied on the Board's authority under section 10 of the Home
Owners' Loan Act (HOLA) \4\ and section 171 of the Dodd-Frank Act.\5\
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\1\ Capital Requirements for Supervised Institutions
Significantly Engaged in Insurance Activities, 81 FR 38631 (June 14,
2016).
\2\ Regulatory Capital Rules: Risk-Based Capital Requirements
for Depository Institution Holding Companies Significantly Engaged
in Insurance Activities, 84 FR 57240 (October 24, 2019).
\3\ Public Law 111-203, 124 Stat. 1376, 1435-38 (2010), as
amended by Public Law 113-279, 128 Stat. 3017 (2014).
\4\ 12 U.S.C. 1467a.
\5\ 12 U.S.C. 5371.
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The Board is responsible for protecting the safety and soundness of
certain banking organizations. This responsibility includes
establishing minimum requirements for the capital of holding companies
of groups that conduct both depository and insurance operations.\6\ In
the United States and other jurisdictions, the current risk-based
capital assessment methodologies have been designed specifically for
either insurance or banking.
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\6\ Id.
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In view of the above, the Board is adopting aggregation-based
capital requirements for insurance depository institution holding
companies. These capital requirements aggregate the required capital
from insurance activities, as determined based on insurance capital
rules set by the states or foreign jurisdictions, and banking
[[Page 82951]]
activities, as determined based on banking capital rules. These
requirements fulfill the Board's goal of designing an appropriate
capital standard for insurance depository institution holding
companies. Prior to this rule, savings and loan holding companies
(SLHCs) with significant insurance operations have been excluded from
the Board's banking capital rule pending this rulemaking, while bank
holding companies (BHCs) with significant insurance operations have
been required to comply with the Board's banking capital rule.
In addition to the NPR, the Board invited comment on a draft
reporting form ``Capital Requirements for Board-Regulated Institutions
Significantly Engaged in Insurance Activities'' (form FR Q-1) and
associated instructions, which would gather data related to the BBA,
and published a white paper describing how the BBA translated between
the banking and insurance capital frameworks. The Board also launched a
quantitative impact study (QIS) alongside the NPR using the draft
reporting form. The comments received on the NPR and on the reporting
form and instructions, as well as the QIS results, have informed this
final rule and are discussed in the following sections. The reporting
form and instructions are being finalized along with this final rule
with certain changes in response to the comments.
A. Background
In response to the 2007-09 financial crisis, Congress enacted the
Dodd-Frank Act, which, among other purposes, was enacted to ensure
appropriate supervision of depository institution holding companies
without regard to charter type of their insured depository institution
subsidiaries and to streamline the supervision of such holding
companies. In furtherance of these purposes, Title III of the Dodd-
Frank Act expanded the Board's supervisory role by transferring to the
Board all supervisory functions related to SLHCs and their non-
depository subsidiaries.
As a result, the Board became the Federal supervisory authority for
all depository institution holding companies, including insurance
depository institution holding companies.\7\ Concurrent with the
expansion of the Board's supervisory role, section 616 of the Dodd-
Frank Act amended HOLA to provide the Board express authority to adopt
regulations or orders that set capital requirements for SLHCs.\8\
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\7\ Public Law 111-203, title III, section 301, 124 Stat. 1520
(2010).
\8\ Dodd-Frank Act 616(b); HOLA sec. 10(g)(1). Under Title I of
the Dodd-Frank Act, the Board also supervises any nonbank financial
companies designated by the Financial Stability Oversight Council
(FSOC) for supervision by the Board. Under section 113 of the Dodd-
Frank Act, the FSOC may designate a nonbank financial company,
including an insurance company, to be supervised by the Board.
Currently, no firms are subject to the Board's supervision pursuant
to this provision.
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Any capital requirements the Board may establish for SLHCs are
subject to minimum standards under the Dodd-Frank Act. Specifically,
section 171 of the Dodd-Frank Act requires the Board to establish
minimum risk-based and leverage capital requirements on a consolidated
basis for depository institution holding companies. These requirements
must be not less than the capital requirements established by the
Federal banking agencies to apply to insured depository institutions
under the prompt corrective action regulations implementing section 38
of the Federal Deposit Insurance Act,\9\ nor quantitatively lower than
the capital requirements that applied to these institutions when the
Dodd-Frank Act was enacted.
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\9\ 2 U.S.C. 1831o. The floor for capital requirements
established pursuant to section 171 of the Dodd-Frank Act, referred
to as the ``generally applicable'' requirements, is defined to
include the regulatory capital components in the numerator of those
capital requirements, the risk-weighted assets in the denominator of
those capital requirements, and the required ratio of the numerator
to the denominator.
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Section 171 of the Dodd-Frank Act was amended in 2014 (2014
Amendment) to provide the Board flexibility when developing
consolidated capital requirements for insurance depository institution
holding companies.\10\ The 2014 Amendment permits the Board, in
establishing minimum risk-based and leverage capital requirements on a
consolidated basis, to exclude companies engaged in the business of
insurance and regulated by a state insurance regulator, as well as
certain companies engaged in the business of insurance and regulated by
a foreign insurance regulator.
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\10\ Public Law 113-279, 128 Stat. 3017 (2014).
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Section 171 of the Dodd-Frank Act also provides that the Board may
not require, under its authority pursuant to section 171 of the Dodd-
Frank Act or HOLA, a supervised firm that is also a state-regulated
insurer and files financial statements with a state insurance regulator
or the National Association of Insurance Commissioners (NAIC) utilizing
only Statutory Accounting Principles (SAP) to prepare such financial
statements in accordance with U.S. generally accepted accounting
principles (GAAP).\11\ The Board notes that, unlike GAAP, SAP does not
include an accounting consolidation concept. As discussed in detail in
subsequent sections of this SUPPLEMENTARY INFORMATION, the BBA is thus
an aggregation-based approach, designed to comprehensively capture
risk, including all material risks, at the level of the entire
enterprise or group.
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\11\ 12 U.S.C. 5371(c)(3)(A).
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The Board is adopting the BBA in this final rule in order to set
risk-based capital requirements for BHCs and SLHCs that are
significantly engaged in insurance activities.
B. Description of the Building Block Approach
As adopted in this final rule, the BBA aggregates the available
capital and required capital positions of certain entities determined
to be building block parents in order to determine the capital position
of top-tier supervised insurance depository institution holding
companies (supervised insurance organizations or SIOs). The BBA
expresses such a capital position as a BBA ratio, which is the ratio of
the aggregated available capital to the aggregated required capital of
the enterprise.\12\ The SIO must maintain a BBA ratio of at least 250
percent and a capital conservation buffer of 150 percent, resulting in
a total requirement of 400 percent.
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\12\ When aggregating required capital for the denominator, the
BBA follows NAIC Risk-Based Capital in using the Authorized Control
Level (ACL) risk-based capital. This is the amount of capital below
which a state insurance regulator would be authorized to take
control of the company.
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The BBA groups legal entities together into building blocks to
calculate the BBA ratio. These building blocks are developed by
grouping entities in the supervised insurance organization that are
covered under the same regulatory capital framework. By grouping
related legal entities in this manner, the BBA maintains the regulatory
framework developed for the particular business activity and reduces
regulatory burden. Without grouping in this type of capital construct,
a large SIO would need to perform a capital calculation for each of
hundreds of legal entities. Typically, the building blocks follow other
existing legal-entity capital regulations. For instance, a typical U.S.
legal entity that offers life insurance is assessed together with most
of its subsidiaries using its existing regulatory capital framework,
NAIC Risk-Based Capital (RBC). Depository institutions and their
subsidiaries are assessed using Federal banking capital rules. The BBA
does, however, sometimes deviate from
[[Page 82952]]
existing regulatory groupings to ensure risks are appropriately
captured. For example, certain financial companies owned by insurance
companies are not directly subject to capital regulation. For these
companies, the parent's regime assesses a simplified capital charge
that may not appropriately reflect the risk.
The BBA separately assesses, applies a capital regime to, and
aggregates these companies if they are material and engage in financial
activities and their risks would not otherwise be appropriately
measured.\13\
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\13\ For example, it would typically be inappropriate to assess
the risk of a material financial subsidiary engaging primarily in
derivative transactions by application of a risk charge applied to
its net equity.
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The BBA makes certain adjustments to the required and available
capital of entities when preparing the building blocks for aggregation.
Some of these adjustments avoid double counting capital or risk, others
increase comparability among SIOs, while others are intended to align
with certain aspects of the banking capital requirements to reduce the
potential for arbitrage. One such adjustment is requiring all capital
instruments to meet certain criteria and subjecting certain types of
capital instruments to limits. These criteria and limits substantively
match those applied to other depository institution holding companies.
The BBA aggregates the adjusted capital positions of the building
blocks to calculate an SIO's capital position. To enable aggregation of
the output of different capital frameworks, the BBA includes a
translation mechanism called scaling. Scaling converts a capital
position from one capital framework to its equivalent in another
capital framework. The BBA then sums the scaled, adjusted capital
position of each building block to calculate an SIO's capital position.
This aggregated capital position is compared to the minimum requirement
and capital conservation buffer discussed above.
C. Summary of Comments Received on the NPR and Form FR Q-1
The Board received 18 substantive comment letters on the proposal
and several recommendations from the Board's Insurance Policy Advisory
Committee. Comments were received from insurers supervised by the
Board, insurers not supervised by the Board, insurance trade groups, a
U.S. Senator, and the NAIC.
Most commenters supported the BBA's general framework, which
aggregates existing capital requirements to determine an enterprise-
wide capital requirement. Commenters strongly preferred applying this
framework, rather than other frameworks like the banking capital rules
or the Insurance Capital Standard, to depository institution holding
companies that are significantly engaged in insurance activities. The
Insurance Capital Standard is being developed by the International
Association of Insurance Supervisors. Indeed, certain commenters argued
that the BBA should further leverage existing insurance capital
requirements. Although commenters were supportive of the framework,
some commenters expressed concerns with the level of detail that would
be required in form FR Q-1 due to the proposed requirement to report
assets and liabilities of inventory companies.
Specific comments are discussed below in the sections that follow.
Some of the main issues that were raised by commenters include:
Section 171 Calculation--Most commenters argued that the section
171 calculation was flawed and should not be adopted. Commenters argued
the BBA would still comply with section 171 of the Dodd-Frank Act
without this calculation.
Calibration--Most commenters supported setting the BBA's
requirement equal to other banking capital requirements based on the
indicated results from the scaling white paper, rather than including
an upward adjustment designed to account for uncertainty. These
commenters contended that the upward adjustment would have resulted in
excess conservatism.
Qualifying Capital Instruments and Limits--Most commenters argued
that the Board's proposed capital instrument qualification criteria
were too narrow and that senior debt should qualify as capital,
although several commenters and the Board's Insurance Policy Advisory
Committee disagreed. Some commenters and the Board's Insurance Policy
Advisory Committee also argued for increasing the proposed limits on
less loss-absorbing tiers of capital instruments. Some commenters also
argued that surplus notes should qualify as tier 1 capital and if they
are tier 2, then no limits should apply.
Insurance Adjustments--Commenters expressed diverging opinions on
the proposed adjustments to reduce differences among states in
insurance capital regulation. Along with the NPR, the Board also
invited comments about related work on the International Association of
Insurance Supervisors' Insurance Capital Standard. In the NPR, the
Board asked for the comparative strengths and weaknesses of both
approaches. The Board appreciates the comments received on this work
and will take these comments into consideration in the ongoing
International Association of Insurance Supervisors deliberations.
D. Main Changes in the Final Rule and Form FR Q-1
The final rule differs from the proposal in several ways. One
change relates to the capital conservation buffer. The final rule
includes a 150 percent capital conservation buffer, rather than the 235
percent buffer proposed in the NPR. This smaller capital conservation
buffer better aligns the BBA's stringency with the Board's banking
capital rule. With this change, the BBA's total capital requirement
equals the total requirement applied to most other banking
organizations, as estimated based on the parameters derived in the
Board's scaling white paper.
The final rule includes an additional tier of capital instruments,
additional tier 1 capital, that is eligible as available capital. The
proposal only included two tiers of capital because no SIO had issued
additional tier 1 capital. Commenters requested its addition in order
to allow SIOs flexibility in their capital structures. In order to
provide such flexibility, and be consistent with the Board's banking
capital rule, the final rule includes this additional capital tier. The
additional tier 1 capital limit has been set at 100 percent of the
building block capital requirement for the top-tier parent. Any amount
of additional tier 1 capital above this amount would be eligible for
inclusion as tier 2 capital, subject to limitations on the inclusion of
tier 2 capital instruments.
The final rule also increases a proposed limit to 150 percent on
the amount of tier 2 capital instruments that could have been counted
toward the building block capital requirement of a top-tier parent
holding company in an SIO. Under the proposal, the BBA would have
limited tier 2 capital instruments to be no more than 62.5 percent of
the building block capital requirement for the top-tier parent.
Commenters expressed concern that the conservative nature of statutory
accounting distorts the ratio of tier 2 capital instruments to common
equity tier 1 capital which causes the 62.5 percent to be overly
conservative.
The proposal included an adjustment that would have removed the
effects of legacy treatment or transitional measures under a capital
framework in determining capital requirements. Some commenters
expressed concerns with
[[Page 82953]]
the burden associated with adjusting capital resources to eliminate the
impact of transitional provisions or legacy treatment when there are
changes in an underlying capital regime. Some commenters were
particularly concerned with having to restate legacy business under the
NAIC Principles Based Reserving Standard (PBR) for life insurance
reserves. PBR was adopted only prospectively by the NAIC and states.
The final rule maintains the legacy treatment and transitional
requirements for consistency in measurement, but provides a simple
factor-based approximation rather than a full PBR calculation to the
legacy reserves. This approach will allow for consistency for the
measurement of life insurance reserves while minimizing burden.
In addition to the changes discussed above, the final rule
simplifies the insurance adjustments, increases the limits on certain
capital instruments, and eliminates an exception of certain asset
managers from being material financial entities, and reduces the burden
of the proposed form FR Q-1.
The Board is also making changes to the reporting form FR Q-1 as
part of this final rule. The final form FR Q-1 is less burdensome than
in the proposal. In particular, SIOs will not need to report the assets
and liabilities of all subsidiaries. Numerous companies said providing
this information would be difficult. Additionally, the annual due date
for form FR Q-1's has been moved from March 15 to March 31 to allow
companies additional time to complete the reporting template after
their statutory filings are due.
II. Effective Date and Scope
A. Scope
The proposal would have applied to SLHCs significantly engaged in
insurance activities. Under the proposal, a firm would have been
subject to the BBA if the top-tier SLHC were an insurance underwriting
company or the top-tier SLHC, together with its subsidiaries, if 25
percent of its total consolidated assets were in insurance underwriting
subsidiaries (other than assets associated with insurance underwriting
for credit risk related to bank lending). For purposes of this
threshold, a supervised firm would have calculated its total
consolidated assets in accordance with U.S. GAAP, or, if the firm does
not calculate its total consolidated assets under U.S. GAAP for any
regulatory purpose (including compliance with applicable securities
laws), the company would have been permitted to estimate its total
consolidated assets, subject to review and adjustment by the Board. The
proposal also would have permitted the Board to determine to apply the
BBA to another Board-regulated institution.\14\
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\14\ The preamble to the proposal indicated that this type of
determination may be appropriate with respect to, for example, an
intermediate holding company, if its top-tier parent company were
primarily engaged in non-financial commercial activity.
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As consolidated supervisor of the top-tier depository institution
holding company of an insurance depository institution holding company,
the Board proposed to include, within the scope of the BBA calculation,
all owned or controlled subsidiaries of this top-tier parent. The NPR
sought comments about whether the BBA should apply to BHCs. The
proposal would have excluded BHCs; however, the NPR noted the Board
would consider subjecting BHCs significantly engaged in insurance
activities to the BBA in the final rule in light of the enactment of
the Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA).\15\ This Act allowed Federal savings associations with total
consolidated assets of up to $20 billion, as reported to the Office of
the Comptroller of the Currency (OCC) as of year-end 2017, to elect to
operate as covered savings associations.\16\
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\15\ Public Law 115-174, 132 Stat. 1296 (2018).
\16\ EGRRCPA section 206. With limited exceptions, a covered
savings association has the same rights and privileges, and is
subject to the same duties, restrictions, penalties, liabilities,
conditions, and limitations, as a national bank that has its main
office in the same location as the home office of the covered
savings association. The Board generally treats a company that
controls a covered savings association as a bank holding company.
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Four commenters addressed the scope of the BBA in their comments.
One commenter supported applying the BBA to BHCs significantly engaged
in insurance activities. Two commenters asked for clarifications
related to 25 percent asset test. These commenters noted that some SIOs
do not calculate consolidated assets and contended that the Board
legally cannot require GAAP financial statements from certain insurers.
They asked that the asset test be aligned with 12 CFR part 246 (Board
Regulation TT), which concerns the assessment of fees from certain
Board- regulated companies based on their total assets and contains a
provision for estimating total assets in the absence of GAAP
statements. One commenter recommended that the BBA include additional
flexibility to exclude certain companies within an SIO from the BBA and
instead treating a subsidiary company as if it were the top tier. This
commenter was concerned that the Board may lack the legal authority to
select a mid-tier holding company as the top-tier holding company for
purposes of the BBA when the insurance company is controlled by a
company significantly engaged in non-insurance commercial activities.
Another commenter suggested explicitly excluding certain non-operating
holding companies from the BBA.
Based on the comments received, as well the Board's policy to
achieve regulatory consistency across both types of depository
institution holding companies, the final rule adopts the proposed scope
of the BBA framework with a change to include BHCs significantly
engaged in insurance activities. The final rule does not alter the
proposed 25 percent asset test but does address the comments received.
The final rule will instead allow SIOs that do not calculate
consolidated GAAP assets to provide an estimate of consolidated total
assets. The calculation would be subject to review and adjustment by
the Board.
The final rule does not amend the Board's authority to modify the
scope of the BBA, as the reservations of authority in the final rule
and elsewhere in the banking capital rule are sufficient to allow the
Board to exclude from the BBA a top-tier holding company that is a
controlling depository institution holding company under this rule.
While possible, this likely will not occur frequently due to statutory
mandates to ensure that depository institution holding companies can
serve as a source of strength to their depository institutions, as well
as other policy considerations. The final rule does streamline the
reservation of authority to clarify the Board's authority to require an
SIO to make certain decisions involved in the BBA calculation, such as
the identification of the top-tier building block parents, building
block parents, and Material Financial Entities (MFEs).
B. Effective Date
The NPR did not propose an effective date for the BBA framework.
Several commenters requested delaying the BBA's effective date
significantly beyond its finalization. One suggested having at least a
two-year transition period from the effective date, or a longer
transition period if the finalized total capital requirement were above
400 percent. This commenter also suggested providing a further
opportunity for public comment regarding any changes related to the
proposed form FR Q-1, which could impact the effective date because
form FR Q-1 is needed to effectuate the BBA's requirements. Another
[[Page 82954]]
commenter suggested that the first filing date of the associated form
FR Q-1 should be two years after the publication date of the final
rulemaking.
One commenter suggested using a five-year monitoring period, like
that used by the International Association of Insurance Supervisors
(IAIS) for its Insurance Capital Standard, before making the BBA
effective. Other commenters argued that there is a need to delay
certain of the proposed requirements of form FR Q-1. The proposed form
FR Q-1 attestation section of the cover page would have required
reporting firms to attest that effective controls were in place
throughout the reporting period. Because form FR Q-1 was proposed as an
annual report, commenters asserted that at least a one-year delay would
be needed between the final rule becoming effective and the first form
FR Q-1 attestation requirement to avoid it applying retroactively.
Under the final rule, companies must comply with most of the BBA
beginning on January 1, 2024. Beginning at that time, companies are
expected to hold capital sufficient to comply with the BBA's minimum
requirement.
Companies must first report on their capital adequacy under the BBA
capital requirement as of December 31, 2024. As described above, the
comments received on form FR Q-1 primarily related to reporting of
legal entities, filing date, and reporting of results. The Board
received only non-substantive clarification requests through the QIS
process on form FR Q-1.
Given that only small technical changes were made to the proposed
reporting form based on these comments and requests for clarification,
the Board elected not to seek further comments on form FR Q-1.
Additionally, the January 1, 2024, effective date of this rules allows
firms time to ensure that effective internal controls are in place for
the first reporting date. As such, the first form FR Q-1 submissions,
which will be due in March 2025, must include the attestation section
of the cover page.
Firms that are not initially subject to the BBA, but subsequently
become subject to the BBA during January through June in a year, will
be required to begin submitting the form FR Q-1 in March of the
calendar year following the year they become subject to the BBA, except
for the attestation section of the cover page, which must be submitted
beginning with the firm's second form FR Q-1. Firms that are not
initially subject to the BBA, but subsequently become subject to the
BBA during July through December in a year, will be required to begin
submitting the form FR Q-1 in March of the second calendar year
following the year they become subject to the BBA, except for the
attestation section of the cover page, which must be submitted
beginning with the firm's second form FR Q-1.
The final rule also clarifies the timing of the application of the
buffer. In the absence of any enterprise-wide group income calculation,
the BBA links the amount of eligible distributions under the capital
conservation buffer with changes to building block available capital.
Calculating the change in building block available capital requires
two years of BBA data, meaning that firms would not be able calculate
their permissible distributions before completing their second form FR
Q-1. Consequently, the BBA's buffer requirements are effective starting
with the submission of a firm's second form FR Q-1.\17\ In the year
proceeding the second form FR Q-1 submission, the Board expects firms
to consider the pending requirements and to set their distribution
policies to avoid needing a large and sudden change in payouts at the
effective date.
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\17\ See 12 CFR 217.306.
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III. Dodd-Frank Act Capital Calculation
The proposal would have applied a separate minimum risk-based
capital requirement calculation to insurance depository institution
holding companies, which would have used the flexibility afforded by
the 2014 Amendment to exclude certain state- and foreign-regulated
insurance operations and to exempt top-tier insurance underwriting
companies from the risk-based capital requirement. The proposed section
171 calculation would have applied the Board's existing minimum risk-
based capital requirements to a top-tier insurance SLHC on a
consolidated basis when this company is not an insurance underwriting
company. In the case of an insurance SLHC that is an insurance
underwriting company, the proposal would have applied the requirements
to any subsidiary SLHC of an insurance SLHC, where the subsidiary SLHC
is not itself an insurance underwriting company, provided that the
subsidiary SLHC is the farthest upstream non-insurer SLHC (i.e., the
subsidiary SLHC's assets and liabilities are not consolidated with
those of a holding company that controls the subsidiary for purposes of
determining the parent holding company's capital requirements and
capital ratios under the Board's banking capital rule) (an insurance
SLHC mid-tier holding company).
The proposed section 171 calculation would have been implemented by
amending the definition of ``covered savings and loan holding company''
for the purposes of the Board's banking capital rule.\18\ The proposal
would have resulted in an insurance SLHC becoming a covered SLHC
subject to the requirements of the Board's banking capital rule unless
it was a legacy unitary SLHC \19\ that derived 50 percent or more of
its total consolidated assets or 50 percent or more of its total
revenues on an enterprise-wide basis (as calculated under GAAP) from
activities that are not financial in nature. However, the proposal
would not have required top-tier SLHCs that are engaged in insurance
underwriting and regulated by a state insurance regulator, or certain
foreign insurance regulators, to comply with the generally applicable
risk-based capital requirements.\20\ Instead, those requirements would
have applied to any insurance SLHC mid-tier holding companies.
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\18\ 12 CFR 217.2.
\19\ This term refers to a SLHC that meets the requirements of
section 10(c)(9)(C) of HOLA (12 U.S.C. 1467a(c)(9)(C).
\20\ In accordance with section 171 of the Dodd-Frank Act, a
foreign insurance regulator that falls under this provision is one
that ``is a member of the [IAIS] or other comparable foreign
insurance regulatory authority as determined by the Board of
Governors following consultation with the State insurance
regulators, including the lead State insurance commissioner (or
similar State official) of the insurance holding company system as
determined by the procedures within the Financial Analysis Handbook
adopted by the [NAIC].''
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As noted above, commenters opposed this calculation and argued that
the BBA would comply with section 171 of the Dodd-Frank Act without
this additional calculation. Commenters contended that the proposal
without the section 171 calculation meets the Board's statutory
requirements under section 171 of the Dodd-Frank Act, as amended by the
2014 Amendment, to establish minimum risk-based capital requirements
for these companies. Commenters argued that the section 171 calculation
would introduce burdens and costs that do not meaningfully advance the
Board's supervisory objectives. Some commenters also contended that the
2014 Amendment indicates that Congress did not intend for the Board to
implement the section 171 calculation. Commenters argued that the
section 171 calculation duplicates certain requirements of the BBA and
inappropriately treats firms differently according to legal form.
The Board considered the comments and has decided to include the
section
[[Page 82955]]
171 calculation in the final rule. Section 171 of the Dodd-Frank Act
generally requires that the minimum risk-based capital requirements
established by the Board for depository institution holding companies
apply on a consolidated basis. The Board believes that including the
section 171 calculation accords with the plain language meaning of
section 171 of the Dodd-Frank Act, considering also the use of terms in
section 171 elsewhere in the Federal banking laws, and the legislative
history of section 171 and the 2014 Amendment. Moreover, the Board
believes that the treatments for insurance activities under the section
171 calculation is an appropriate exercise of the discretion given to
the Board by Congress in the 2014 Amendment.
The proposed section 171 calculation would have allowed an
insurance SLHC subject to the generally applicable risk-based capital
requirements (i.e., that is not a top-tier insurance underwriting
company) to elect not to consolidate the assets and liabilities of all
of its subsidiary state-regulated insurers and certain foreign-
regulated insurers. The proposal would have provided two alternative
approaches if this election is made. Under the first alternative, the
holding company could have elected to deduct the aggregate amount of
its outstanding equity investment in its subsidiary state-regulated and
certain foreign-regulated insurers, including retained earnings, from
its common equity tier 1 capital elements. Under the second
alternative, the holding company could have included the amount of its
investment in its risk-weighted assets and assigned to the investment a
400 percent risk weight, consistent with the risk weight applicable
under the simple risk-weight approach in Sec. 217.52 of the Board's
banking capital rule to an equity exposure that is not publicly
traded.\21\
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\21\ 12 CFR 217.52(b)(6).
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A commenter expressed concerns regarding the proposed equity-
deduction treatment, contending that it would be unduly punitive. The
commenter also urged the Board to permit firms to risk-weight a
company's net equity investment in insurance operations consistently
with NAIC RBC's treatment of equity investments in affiliates. The
commenter also suggested that the Board permit firms to satisfy the
section 171 calculation through use of the Small Bank Holding Company
and Savings and Loan Holding Company Policy Statement and measuring
compliance with the applicability thresholds of that statement after
applying the election not to consolidate the assets and liabilities of
subsidiary state-regulated insurers and certain foreign-regulated
insurers.
In the final rule, firms that elect not to consolidate the assets
and liabilities of all of its subsidiary state-regulated insurers and
certain foreign-regulated insurers have the option to choose between
the proposed treatments. This optional provision should provide firms
with greater flexibility to apply an appropriate treatment in view of a
firm's individual structural and other business circumstances. In the
final rule, a firm that makes such an election and chooses to risk-
weight its net equity investment in the deconsolidated subsidiaries
must apply a risk weight of 400 percent, consistent with the proposal.
The Board believes that this treatment is appropriate considering the
risk weights applied to non-publicly traded equity exposures. Finally,
a firm may not comply with the section 171 calculation through use of
the Small Bank Holding Company and Savings and Loan Holding Company
Policy Statement.\22\ This policy statement states expressly that the
statement applies only to holding companies that are ``not engaged in
significant nonbanking activities either directly or through a nonbank
subsidiary''; \23\ the section 171 calculation applies only to
companies that are members of a holding company organization that is
significantly engaged in insurance activities, a nonbank activity.
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\22\ 12 CFR part 225, appendix C.
\23\ Id. section 1.
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IV. Minimum Capital Requirement and Capital Conservation Buffer
The proposal was designed to produce an enterprise-wide risk-based
capital requirement that is not less stringent than the results derived
from the Board's banking capital rule. To enable aggregation of
available capital and capital requirements across different building
blocks, the proposal included a mechanism (scaling) that would have
translated a capital position under one capital framework to its
equivalent in another capital framework.\24\ At the enterprise level,
the proposal would have applied a minimum risk-based capital
requirement that leverages the minimum requirement from the Board's
banking capital rule, expressed as its equivalent value in terms of the
BBA ratio based on the Board's published scaling white paper. In
addition to this equivalent value, the proposal would have also
included a margin of conservatism to provide a heightened degree of
confidence that the BBA's requirement would be compliant with section
171 of the Dodd-Frank Act, which requires the BBA to be ``not less
than'' the Board's banking capital requirements. In addition to
complying with section 171 of the Dodd-Frank Act, calibrating the BBA
to the same stringency level as the banking capital requirements
minimizes the incentive for depository institution holding companies to
acquire or sell insurance operations due to disparate capital
requirements.
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\24\ Two building blocks under two different capital frameworks
cannot typically be added together if, as is frequently the case,
each framework has a different scale for its ratios and thresholds.
As discussed below in section VII, the BBA proposes to scale and
equate capital positions in different frameworks through analyzing
historical defaults under those frameworks.
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The proposal would have established a minimum BBA ratio of 250
percent and a capital conservation buffer of 235 percent. Together,
these would have created a 485 percent total requirement. Insurers that
breach this total requirement would have faced limits on capital
distributions such as dividend payments and on discretionary bonus
payments. The proposed minimum ratio, 250 percent, would have aligned
with the midpoint between two prominent, existing state insurance
supervisory intervention points, the ``company action level'' and
``trend test level'' under state insurance RBC requirements. To
determine the appropriate threshold for a capital conservation buffer
under the BBA, the Board took a similar approach to how it determined
the minimum requirement. The full amount of the buffer under the
Board's banking capital rule, 2.5 percent, translates to approximately
235 percent under the NAIC RBC framework. This translated buffer
threshold would have been applied in the BBA.
Commenters criticized the proposed margin for conservatism and
indicated that proposed minimum capital requirements and total capital
requirements are significantly higher than the banking capital
requirements. Some of these comments distinguished between including
margins for conservatism in the minimum and total capital requirements.
Consequently, while most commenters opposed including the margins in
the total requirement, only some opposed uplifting the minimum
requirement. Commenters justified this nuance because section 171 of
the Dodd-Frank Act applies to only the minimum requirement. Legally,
any margin included in the minimum requirement could be offset by a
smaller capital conservation buffer. This would reduce
[[Page 82956]]
the BBA's total requirement from 485 percent to 400 percent.\25\
Commenters argued that the margin could competitively disadvantage SIOs
as compared to other insurers or alternatively create externalities for
companies not subject to the rule by changing industry-wide perceptions
of capital adequacy.
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\25\ The proposal's capital requirement included an
approximately 85 percent increase over the best-estimate translation
to account for the uncertainty. That is, the best-estimate
translation of an 8 percent total capital ratio is a BBA ratio of
near 165 percent. This was uplifted to a 250 percent proposed
requirement in the proposal. Removing this 85 percent uplift from
the buffer reduces the proposed 485 percent total BBA ratio
requirement to 400 percent. A 400 percent BBA ratio requirement
aligns with the best-estimate translation of a 10.5 percent total
capital ratio.
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Several commenters also argued that other aspects of the BBA are
excessively conservative. These commenters criticized the BBA for the
lack of diversification credit between entities in the group, treatment
of captive reinsurance transactions, and criteria for including capital
instruments in available capital. Several commenters argued the BBA's
capital requirements should be reduced in order to offset these
conservative aspects of the framework.
Some commenters suggested fundamental changes to the calibration of
the BBA. A few commenters argued that the BBA's requirements should not
equal those applied to other banking organizations. Two commenters
suggested instead tailoring the BBA's requirements to the loss
experience of insurers. Two other commenters argued for eliminating the
capital conservation buffer, either because insurance does not create
systemic risk or because subsidiary depository institutions already are
subject to a buffer requirement. Finally, one commenter argued that any
capital requirements in excess of state insurance capital requirements
would be unlawful and inappropriate. In the alternative, this commenter
argued that an SIO buffer should depend on the size of its depository
institution.
Commenters also raised concerns about the impact of breaching the
BBA requirements and how they would interact with the NAIC RBC
requirements. First, two commenters disagreed with limiting
policyholder dividends when the BBA's total requirement is breached.
Second, some commenters questioned how the BBA's requirements would
interact with NAIC RBC, which is calibrated differently. An additional
commenter requested clarification of the impact of not meeting the
total capital requirement.
Based on the comments received, the Board has decided to modify the
proposed calibration of the BBA. Most significantly, the Board has
removed the margin from the proposed capital conservation buffer,
dropping the BBA's total requirement from 485 percent to 400 percent.
Like the proposal, the final rule attempts to calibrate the BBA to
the same level of stringency as the Board's banking capital rules. The
BBA takes into account the different risks involved in insurance
activities, on the one hand, and banking activities, on the other,
through its aggregation process, rather than through an altered
calibration or by eliminating the capital conservation buffer. While
some commenters suggested that the BBA's calibration should be tailored
to insurance, no commenter explained either how or why engaging in
insurance activities should change the stringency of capital
requirements that apply to a bank holding company or SLHC.\26\
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\26\ A commenter contended that the proposal was inconsistent
with the McCarran-Ferguson Act, 15 U.S.C. 1011 et seq. The Board
believes that section 5 of the Bank Holding Company Act, section
10(g) of the Home Owners' Loan Act, and section 171 of the Dodd-
Frank Act provide authority for the Board to establish capital
requirements for companies significantly engaged in insurance
activities that have elected also to engage in the business of
banking by operating a subsidiary bank or savings association. In
particular, the 2014 Amendment expressly contemplates that the Board
would establish minimum capital requirements for such companies.
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To ensure safety and soundness of the SIOs, the BBA's minimum
capital requirement includes a margin. This margin ensures, to a high
degree of confidence, that the BBA's minimum requirement is not less
than the banking capital requirements. The margin's size corresponds to
the upper bound of a 95 percent confidence interval on the BBA's
calibration from the scaling regressions.\27\ Sensitivity tests of the
calibration using different assumptions also informed the analysis.\28\
Consequently, the final rule does not include a margin for the capital
conservation buffer. As a result, the BBA's total requirement equals
the total requirement applicable to most other banking organizations.
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\27\ The Board used Monte Carlo simulation to translate the
standard errors displayed in Table 2 of the white paper to a
confidence interval for the calibration. In 95 percent of
simulations, 8 percent total capitalization Risk Weighted Assets
ratio translated to between 80 percent ACL RBC and 251 percent ACL
RBC.
\28\ Table 3 of the white paper parameterizes the scalars using
alternative assumptions. These parameters can be used to translate 8
percent and 10.5 percent risk-weighted assets to NAIC RBC using the
scaling formulas derived in Appendix 1.
---------------------------------------------------------------------------
The minimum capital ratio of 250 percent has not been reduced in
the final rule in response to the comments about the proposal's alleged
conservatism in its treatment of certain capital instruments,
application of the banking rules to unregulated entities, lack of
diversification credit, or treatment of prescribed and permitted
practices. While some of these differences may make the BBA more
conservative than NAIC RBC, the differences provide for a consistent
level of conservatism between the BBA and the banking capital rule and
consistency between SIOs. For example, the Board's capital rule applies
to holding companies on a consolidated basis, including any unregulated
entities. The BBA treatment of some non- depository institution, non-
insurer subsidiaries of insurance BHCs and insurance SLHCs as MFEs and
application of the banking capital rule to them does not justify
reducing the BBA's calibration to below the banking capital rule.
Additionally, even if the BBA were intended to match the stringency
of NAIC RBC rather than the banking capital rule, many of the
referenced details still would not justify reducing the BBA's
requirements. Senior debt does not qualify as capital for the issuer in
either the BBA or NAIC RBC. If senior debt is downstreamed to a
subsidiary as equity, it qualifies as capital for the subsidiary in
both.\29\ By design, NAIC RBC excludes the parent and other affiliated
companies. The impact of these exclusions varies. If an unregulated
entity is relatively well capitalized, including it would be less
conservative than NAIC RBC. Similarly, prescribed and permitted
practices could either increase or decrease surplus.
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\29\ Senior debt may qualify as capital for the issuer in the
NAIC's Group Capital Calculation (GCC). The BBA is, however,
designed to match the stringency of requirements for other
depository institution holding companies, not the GCC. The BBA and
GCC also have different purposes. The GCC will be used as a tool by
state insurance regulators, rather than a requirement. No GCC ratio
would necessarily produce a similar intervention to a breach of the
BBA's minimum requirement.
---------------------------------------------------------------------------
No changes were made regarding the interaction of the BBA and NAIC
RBC or the operation of the capital conservation buffer. The BBA and
NAIC RBC create separate requirements. SIOs must comply with all
applicable legal requirements. The final rule, like the proposal,
treats policyholder dividends as capital distributions. Policyholder
dividends are how mutual insurers distribute earnings to their owners.
These capital distributions are analogous to shareholder dividends for
stock companies. Prudent management requires limiting these payments
when capital is low.
[[Page 82957]]
V. Determination of Building Blocks and Related Issues
A. Inventory
The proposed BBA calculation started by creating an inventory of
the legal entities in a SIO, which generally would have been all legal
entities under the depository institution holding company. This
inventory would have served as the foundation for the BBA's
aggregation.
As the proposal did elsewhere, it leveraged existing regulations to
define the inventory. Under the proposal, a SIO's inventory would have
included all entities that appear on organizational structure data
reported to the Board or state insurance regulators.\30\
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\30\ The inventory would have contained any entity required to
be reported under the Board's FR Y-6 or Y-10 reports or considered
an affiliate under Statutory Statement of Accounting Principle
(SSAP) 25 and reported on Schedule Y of the insurer's statutory
annual report.
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In rare cases, the inventory would have included a special purpose
entity not included in the organizational structure data provided to
the Board or filed with the state insurance regulators. The
organizational data provided are generally based on control of a
subsidiary, and therefore may not include all entities that the Board
intends to include in the scope of the BBA in order to avoid missing
risks. The burden of including such entities in the inventory would
have been limited, as only special purpose entities with which an SIO
enters into a derivative or reinsurance contract would have been
included.
Under the proposed form FR Q-1, SIOs would have needed to report
certain basic information (e.g., total assets) for all inventory
companies. Two commenters suggested significantly reducing the
reporting burden. The commenters asserted that SIOs could not easily
calculate the total assets of subsidiaries multiple levels down their
organization chart. To avoid this burden, these commenters argued for
excluding immaterial, non-operating entities from the inventory.
One other commenter opposed including in the inventory any company
that is not included in existing regulatory reporting. The commenter
noted that determining whether a company needed to be included in the
inventory would require estimating the company's expected losses, which
would be difficult.
In response to the comments, the final form FR Q-1 requires less
information than the proposal. Specifically, the final form FR Q-1 does
not require reporting the assets and liabilities of inventory companies
whose parents represent less than one percent of the group's assets.
Based on QIS data, this form FR Q-1 change reduces the BBA's burden
similarly to the inventory change suggested by two commenters.
In light of this change to the reporting form FR Q-1, the final
rule does not alter the scope of the inventory in determining the scope
in the BBA. For each inventory company, the final rule still requires
checking whether the company should become a building block parent, but
it would not require the asset and liability information from all
inventory companies. The tests for becoming a building block parent,
which are examined in the next section, focus on whether the BBA
appropriately captures the company's risks. The final rule applies
these tests broadly to avoid excluding material risks.
B. Identifying Capital Frameworks for Each Inventory Company
After the creation of the inventory, the proposal would have
identified each inventory company's applicable capital framework, which
would have been used to partition the inventory companies into building
blocks. For insurance companies, the applicable capital framework would
have been their current regulatory framework, except in rare cases.\31\
For all other companies, the applicable capital framework would have
been the Board's capital rule or, the capital rule applied by the
Federal Deposit Insurance Corporation (FDIC), or the capital rule
applied by the Office of the Comptroller of the Currency (OCC).
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\31\ Examples of rare cases would have included title insurers
and non-scalar compatible insurers.
---------------------------------------------------------------------------
Commenters generally did not oppose the rules for assigning
companies to capital frameworks, but several QIS participants expressed
confusion that the proposal would not actually have applied the
``applicable capital framework'' in all instances.\32\ For instance,
the applicable capital framework for non-insurance subsidiaries of
insurers would have been the Board's capital rule. However, most such
companies would have remained in their insurance parent's building
block. This insurance parent would continue to assess the inventory
companies' risks using its insurance capital framework, unless they are
an MFE.
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\32\ Some commenters criticized the proposed application of the
banking capital rule to companies other than banks. The root
disagreement from these commenters appeared to be with the scoping
and grouping rules rather than the identification of the banking
capital rule as the indicated capital framework for companies not
engaged in insurance. The commenters preferred to either exclude the
companies from the BBA or analyze these companies together with
their parents rather than specifying an alternative capital
framework for analysis.
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To address this comment, the final rule replaces the term
``applicable capital framework'' with ``indicated capital framework.''
This revised terminology better describes the BBA's usage. The
indicated capital framework is the capital framework that would apply
to a company if it were determined to be a building block parent.
C. Identification of Building Block Parents
After identifying an applicable capital framework for each
inventory company, the proposal would have identified building block
parents (BBPs). Under the proposal, a building block parent could have
been one of several different types of companies. The first would have
been the top-tier depository institution holding company. In the
absence of any other identified building block parents, the top-tier
depository institution holding company's building block would have
contained all of the top-tier depository institution holding company's
subsidiaries. A second type of building block parent would have been a
mid-tier holding company that is a ``depository institution holding
company'' under U.S. law. The proposed treatment of these companies as
building block parents would have allowed for the calculation of a
separate BBA ratio at the level of these companies in the enterprise
and helped to ensure that these companies remain appropriately
capitalized.
The proposal would have identified additional building block
parents based on grouping rules that would have generally relied on
existing capital regulations. Relying on these frameworks materially
reduces burden and the potential for unintended consequences.
Additionally, the proposal would have identified certain other
financial entities that are material to the group as building block
parents. The proposal deemed these entities as MFEs, which are
described below.
The proposal would have determined which entities are building
block parents by considering whether the capital framework applicable
to each inventory company or MFE is the same as that of the next-
upstream company that is directly subject to a capital framework.
Generally, the proposal would have had companies subject to the
same capital framework remain in the same building block, except for
one case. This exceptional case would have been where a company's
applicable capital
[[Page 82958]]
framework treats the company's subsidiaries in a way that does not
substantially reflect the subsidiary's risk. For instance, there could
be situations in which NAIC RBC may not fully reflect the risks in
certain subsidiaries (typically, certain foreign subsidiaries) that
assume risk from affiliates.\33\ In such cases, the subsidiary (which
could be a capital-regulated company or MFEs) would have been
identified as a building block parent so that its risks could more
appropriately be reflected in the BBA.
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\33\ The BBA proposes to apply NAIC RBC to such subsidiaries.
However, under state laws, the application of NAIC RBC on the parent
would not normally operate to include the available and required
capital from applying NAIC RBC to the subsidiary. However, when the
subsidiary is identified as a building block parent in the BBA, the
subsidiary's available and required capital under NAIC RBC would be
reflected by the parent after aggregation.
---------------------------------------------------------------------------
The proposal would have taken into account the risks of companies
that are not building block parents indirectly through a building block
parent's capital calculation using its regulatory requirements. This
could have been through consolidation by a building block parent or
accounting for the inventory company as an investment by the building
block parent.
Figure 1 illustrates the how the rules for identifying building
block parents would have worked under the proposal.
[GRAPHIC] [TIFF OMITTED] TR27NO23.000
D. Material Financial Entity
A key step in the proposal's identification of building block
parents would have been assessing whether a financial entity is an MFE.
If an entity was determined to be a MFE in the proposal, it would have
become a building block parent and assessed under either the banking
capital rule or NAIC RBC. The proposal would have defined a financial
entity as material if the top-tier depository institution holding
company's total exposure to it exceeds 1 percent of the top-tier
depository institution holding company's consolidated assets. While a
parent company's exposure to a subsidiary most commonly arises from
potential losses on the parent company's investment, the exposure could
also result from guarantees and other sources. In addition to this
quantitative materiality definition, the proposed rule would have
included a qualitative definition to capture entities that are
otherwise significant when assessing capital. The proposal would have
excluded certain entities, including some asset managers, from the MFE
definition. The proposal would have also contained an option of
electing to treat certain pass-through entities as MFEs or including
their risks in the capital calculation of other building block parents.
[[Page 82959]]
Typically, such a company would be one that serves as a pass-
through or risk management intermediary for other companies under the
insurance depository institution holding company.\34\ If an insurance
depository institution holding company were to make this election, the
risks posed by this company would nonetheless have been reflected in
the BBA. As proposed, the BBA would have required the insurance
depository institution holding company to allocate the risks that the
company faces to the other companies in the enterprise with which the
company engages in transactions.
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\34\ Frequently a pass-through company enters into transactions
with affiliates (e.g., operating insurers) and enters into back-to-
back transactions with third parties to manage risks on a portfolio
basis.
---------------------------------------------------------------------------
Commenters expressed diverging views on the concept of MFEs.
Several commenters criticized some results of identifying MFEs as
building block parents. These commenters noted the burden and
complexity of applying the banking capital rule to non-banking
companies. One commenter noted that this would be particularly
problematic in the case of investment subsidiaries, as it would create
burden and result in a misalignment with how an entity is treated in
its parent's capital regime. This commenter believed these entities
should be assessed along with the insurance company.
Other commenters either explicitly agreed with the proposal or
suggested only minor revisions. Commenters suggested that the threshold
of 1 percent of total assets should be higher. One commenter argued
that using total assets as the base measure for materiality is
inconsistent with state-based insurance regulations, where surplus is
most often used. Additionally, a commenter asserted that using total
assets could penalize property and casualty (P&C) insurers relative to
life insurers because P&C insurers are generally less leveraged.
Another commenter suggested clarifying aspects of the definition of
materiality, particularly with regards to captive insurers who may not
use NAIC Statutory Accounting Practices. One commenter suggested
considering size, off-balance sheet exposures, and activities involving
derivatives or securitizations within the materiality definition.
Consistent with the proposal, the final rule continues to designate
MFEs as building block parents when certain conditions are met. The
Board intends the BBA to capture all material risks within the group.
Designating MFEs as building block parents is essential to ensuring
that these risks are appropriately reflected. Without this designation,
SIOs could easily evade and manipulate BBA results by transferring
risks from regulated entities to unregulated entities that would only
be captured in the BBA through inclusion in their parent's capital
requirement based on an equity risk factor applied to their net equity,
which could result in a very small capital requirement if the entity is
thinly capitalized. Based on the QIS results, identifying MFEs as
building block parents will result in only minimal burden, but could
have a significant impact in reducing the potential for regulatory
arbitrage. All SIOs collectively identified only a very small number of
MFEs in the QIS.
The final rule does, however, modify the definition of materiality
in response to the comments. The final rule uses a threshold of 5
percent of equity of the top-tier depository institution's holding
company rather than 1 percent of its assets. Because the BBA assesses
capitalization, capital represents a better benchmark for materiality
than assets, and 5 percent better aligns with the thresholds used in
other contexts (e.g., accounting). By assessing the materiality of
exposure from all sources (e.g., investments and guarantees), the BBA's
assessment of materiality incorporates the factors suggested by one
commenter (e.g., off-balance sheet exposures).
The Board does not agree that designating an investment subsidiary
as an MFE is problematic, as the proposal contained an exclusion that
would have allowed pass-through treatment of the risk of the entity
rather than treating it as an MFE. In addition, QIS results indicated
this exclusion will operate as intended. The final rule does not change
this treatment.
Based on the QIS, the final rule also makes a small change to
address inventory companies that have no upstream entity and that are
not a top-tier SLHC (e.g., a mutual insurance company controlled
through common management). The NPR did not contemplate these types of
companies. The final rule clarifies that if a company is an MFE or a
company subject to capital regulation, then it must be considered a
building block parent. These companies are exempted from the typical
tests comparing their indicated capital framework to their upstream
building block parent's indicated capital framework.
E. Treatment of Asset Managers
The proposal would have excluded certain asset managers from the
MFE definition. Asset managers owned by insurers would have been
assessed as they currently are in their insurance parent's risk-based
capital calculation based on NAIC RBC. Asset managers owned by
companies assessed using the Board's banking capital rule would have
been consolidated by their parent company. Commenters were divided on
this exclusion from the MFE definition. Several commenters supported
the exclusion and noted that the Board's banking capital rule would not
necessarily be more appropriate than the treatment of these
subsidiaries under NAIC RBC. One commenter supported expanding the
exclusion to also cover any activity that could be undertaken by a
financial subsidiary. This commenter argued that other financial
subsidiaries and asset managers should have the same treatment. This
commenter also noted that the NPR specifically excluded financial
subsidiaries of banks from the MFE definition through a different
exclusion. Another commenter suggested further assessing the risks
presented by different types of asset managers and varying the
treatment of asset managers accordingly. Conversely, several other
commenters did not support the exclusion. The commenters noted that due
to the proposed exclusion, the treatment of material asset managers
would have depended on the organizational structure of the SIO, and
they argued that the BBA should seek to neutralize this discrepancy.
Commenters also disagreed on the best framework for assessing asset
managers. Two commenters supported application of the banking capital
rule to these companies. Other commenters supported broader application
of NAIC RBC to asset managers. One commenter suggested an alternative
approach based on GAAP for a subset of asset managers.
The final rule eliminates the exclusion of asset managers from the
MFE definition so that all asset managers would be treated consistently
under the Board's banking capital rule. Consistent with the proposal,
financial subsidiaries of banks are excluded from MFE definition
because Federal banking law requires deduction of these values from a
bank's capital.\35\
---------------------------------------------------------------------------
\35\ See 12 U.S.C. 24a(c).
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VI. Adjustments
A. Capital Instruments
The proposal would have required certain adjustments at the level
of determining building block available capital that would have
included deducting any capital instrument issued by a company within
the building block,
[[Page 82960]]
that fails one or more of the eleven criteria for tier 2 capital under
the Board's banking capital rule.\36\
---------------------------------------------------------------------------
\36\ The criteria are listed in Sec. 217.608(a) of this rule.
In the banking capital rule, they are codified at 12 CFR 217.20(d).
---------------------------------------------------------------------------
For consistency with the Board's banking capital rule, senior debt
would not have been considered as available capital. As noted above,
many commenters expressed a view that senior debt should be included as
qualifying capital, as it is structurally subordinated to policyholder
liabilities and is similar to surplus notes in that regard. The Board's
Insurance Policy Advisory Committee disagreed with these respondents
and recommended the Board adopt the proposed capital instrument
qualification without modification.
The proposal would have allowed surplus notes to be eligible for
inclusion in tier 2 available capital under the BBA, provided that the
notes meet the criteria. Recognizing that not all surplus notes
previously issued would have addressed all of the tier 2 qualifying
capital criteria, the proposal also including a legacy provision that
allows surplus notes to qualify if issued by a top-tier depository
institution holding company or its subsidiary to a non-affiliate prior
to November 1, 2019. Commenters indicated that surplus notes should be
included as tier 1 qualifying capital and if they only qualified as
tier 2 capital, the proposed 62.5 percent limitation on the amount of
tier 2 capital that can be counted toward an SIO's capital requirement
should be higher.
The proposal also would have limited, at the level of building
block available capital for the top-tier parent, tier 2 capital
instruments to be no more than 62.5 percent of the building block
capital requirement for that top-tier parent. Commenters observed that
statutory accounting is more conservative than GAAP, and this
conservatism reduces the value of common equity tier 1 capital, but not
the value of tier 2 capital instruments. This, in commenters' view,
distorts the ratio of tier 2 capital instruments to common equity tier
1 capital, which the NPR would have used to limit tier 2 capital
instruments.
The Board considered the comments and decided to maintain
consistency with the Board's banking capital rule for both surplus
notes and senior debt. This would require insurers to issue surplus
notes meeting all of the Board's criteria consistent with the banking
capital rule to qualify as tier 1 capital. For surplus notes that only
qualify as tier 2 capital instruments, the Board did change the tier 2
limit as noted above. This also results in senior debt not being
considered as qualifying capital. The Board recognizes the structural
subordination argument; however, this argument applies to the insurance
subsidiaries and not the regulated holding company, which does not
benefit from structural subordination. The Board also recognizes that
there are some similarities between surplus notes and senior debt, but
unlike surplus notes, a default is triggered for non-payment of senior
debt, which would impact the entire group.
Although the Board has decided to maintain consistency with the
banking capital criteria, considering the impact of the conservatism of
statutory accounting as expressed by the commenters, the final rule
increases the tier 2 capital instrument limit to 150 percent of the
building block capital requirement for the top-tier parent. In
addition, in order to provide capital flexibility to firms, the Board
added an additional tier 1 capital component as discussed above.
B. Adjustments for Comparability
The proposal included a series of adjustments to improve
comparability among U.S. insurance entities. These adjustments
including reversing permitted and prescribed practices, disallowing
legacy treatment and transitional measures in the application of new
capital regulation for insurers, and reversing certain transactions
(e.g., captives) in order to ensure consistency between SIOs. While
many aspects of insurance regulation have been harmonized across
states, other aspects can differ significantly across companies and
states.
The proposal would have used a consistent approach by assessing all
U.S. insurers using NAIC RBC. Because NAIC RBC focuses on legal
entities, it can be impacted by intercompany transactions. Some life
insurers have used affiliated reinsurance transactions to alter their
NAIC RBC ratios through the use of captives. These transactions move
risks into captive reinsurance companies, which are generally not
subject to the same accounting, disclosure, and capital requirements as
NAIC RBC. The proposal would have neutralized much of the impact of
these transactions through its grouping rules, which would have
resulted in these affiliated reinsurance companies being analyzed using
the same capital framework applicable to the ceding insurer.
The proposal would have gone further to provide consistent
treatment by mandating the use of the accounting principles promulgated
by the NAIC. States can and do deviate from the framework. States can
either mandate that regulated companies do or do not recognize certain
financial transactions or can require a measurement basis other than
that promulgated by the NAIC (``prescribed practices'') or allow
differences in recognition or measurement for a specific transaction
(``permitted practices''). These practices can decrease the capital
requirements for insurers. For instance, one of the contributing
factors in the use of life insurance captives was that some states
allowed a permitted practice whereby life insurers could transfer
certain life insurance business to a captive that would use a different
accounting. This was due to the belief that some of the life insurance
reserving requirements in NAIC RBC were overly conservative, and the
captives were able to apply recognition and measurement concepts that
were viewed as more appropriate. In moving the business to a captive,
the life insurance entities could receive significant capital
relief.\37\
---------------------------------------------------------------------------
\37\ Matthew Walker and Li Cheng, CFA, FRM, FSA, Page 2,
Standard and Poor's Rating Services, Peaking =Inside the Black
Boxes: Why North American Life Insurers are Using Captives and Why
it Matters, May 12, 2015.
---------------------------------------------------------------------------
The proposed rule included adjustments to address permitted
practices, prescribed practices, or other practices, including legal,
regulatory, or accounting, that departs from a capital framework as
promulgated for application in a jurisdiction. The proposed rule would
have adjusted capital requirements (the denominator in the BBA ratio)
to reverse state permitted and prescribed practices (and, where
relevant, any approved variations applied by solvency regulators other
than U.S. state and territory insurance supervisors). The proposed
adjustment was meant to provide for a consistent representation of
financial information across all companies in the jurisdiction.
The proposal also would have removed all legacy treatment and
transitional measures associated with changes in a capital regime,
unless the measures were approved by the Board.\38\ Transitional
provisions and legacy treatment are utilized to make adoption of
significant changes less burdensome for insurers, but can result in
differences in application between insurers. An example of this,
described above, is the change to PBR by the NAIC and states. Many
states required insurers to apply
[[Page 82961]]
PBR prospectively to new business beginning in 2020. This was optional
in most states beginning in 2017. Due to the long-term nature of
insurance liabilities, the measurement basis of most insurance
liabilities by volume will continue to be the previous rules for many
years. The proposal would have accelerated the transition by removing
transitional measures not approved by the Board, which would have
required applying PBR to legacy business (i.e., all business prior to
2020).
---------------------------------------------------------------------------
\38\ Because the Board has approved all transitional measures
within the banking capital rule, this adjustment would have only
affected insurance transitional measures.
---------------------------------------------------------------------------
Commenters expressed divergent views that generally split into two
high-level positions. One group of commenters argued against the
proposed adjustments to increase consistency. Another group of
commenters supported the adjustments but suggested simplifying certain
aspects of the proposal to reduce burden.
Most commenters argued against making any of the suggested
insurance adjustments. Several commenters argued that state prescribed
and permitted accounting practices aren't motivated by arbitrage. For
example, a company may not update its accounting practices after
previously ambiguous rules are clarified differently. One commenter
linked these practices to a broader issue of supervisory or
jurisdictional discretion, which also exists in other frameworks such
as Europe's Solvency II, and argued that these should all be recognized
by the BBA. Several commenters argued that state prescribed and
permitted practices can more faithfully represent idiosyncratic
situations than the broad, default accounting rules. In these
situations, the commenters argued that the proposed adjustments may
decrease comparability. Similarly, commenters asserted that
retroactively applying PBR could harm comparability because of
differences in assumptions and interpretations. Several commenters also
argued that these adjustments could confuse external stakeholders and
management by causing the BBA to diverge from operating company RBC
ratios. Commenters also stated that applying PBR retroactively would be
burdensome. A large number of commenters argued that the Board should
defer to the states on this topic. One of these commenters argued that
failing to do so jeopardizes financial stability. Other commenters
argued for further study, either of existing permitted and practices or
state regulations, which one commenter believed would indicate that
these adjustments are not needed.
Several commenters supported the proposed adjustments with
suggested modifications to reduce burden. These commenters asserted
that individual state's permitted and prescribed practices can be
justified, but they do harm comparability in aggregate. By volume, most
state permitted and prescribed practices do not address idiosyncratic
issues. Instead, they specify different substantive treatments on
common issues. These commenters argued that the treatment of business
should not depend on the state of the insurer or the cession of
business to an affiliated reinsurance company.
The commenters, however, did suggest simplifying and clarifying the
proposed insurance adjustments. Commenters wanted clarity on the scope
of the adjustment on transitional measures and suggested that it may
have unintended consequences by reversing transition measures related
to the current expected credit losses methodology for estimating
allowances for credit losses or requiring the restatement of insurance
business using old mortality tables. With regard to PBR, commenters
requested clarity on which types and years of business would require
revaluation. Many commenters suggested simplifying or narrowing the
scope of PBR revaluation. Approaches suggested included an
approximation of a full PBR calculation by applying factors to current
reserves, allowing the use of GAAP reserves instead, and allowing
companies without captives or material exposures to opt out. Because
PBR will apply prospectively, commenters suggested that these
simplifications would better balance costs and benefits. One commenter
also suggested retaining flexibility to maintain any given permitted or
prescribed practice.
The final rule simplifies but does not eliminate the proposed
adjustments that increase comparability. Comparing institutions helps
the Board identify unsafe and unsound conditions and could also benefit
other users of the BBA. These adjustments effectively harmonize the
approaches of different states to the approach set collectively through
the NAIC. This aligns with other parts of the BBA. The BBA uses NAIC
RBC, not the approach of any particular state, as the common capital
framework. These adjustments convert individual company financial
statements to that basis and justify not requiring any scaling between
states. The final rule also includes the flexibility to allow any
particular accounting practices if merited through the broad
reservations of authority.
In place of the proposal's reversal of transitional measures that
have not otherwise been approved by the Board, the final rule adopts
the factor-based simplification for PBR suggested by some commenters.
The final rule specifies factors that will be applied to current
statutory reserves for certain types of insurance business that are
subject to legacy treatment under the NAIC rule, to approximate PBR
reserves.\39\ This narrower treatment of transitional measures
eliminates any unintended effects on domestic insurance business. While
the Board may eventually decide to reverse certain transitional
measures in foreign insurance systems, these issues are currently not
material to the Board's supervised population.
---------------------------------------------------------------------------
\39\ A 40 percent factor is applied to all term life insurance
business accounted for using an approach based on the Valuation of
Life Insurance Policies Model Regulation (Regulation XXX). A 90
percent factor is applied to all secondary-guaranteed universal life
insurance products accounted for using Actuarial Guideline XXXVIII--
The Application of the Valuation of Life Insurance Policies Model
(AXXX).
---------------------------------------------------------------------------
C. Title Insurance Issues
The proposal would have assessed title insurers using the banking
capital framework because title insurers currently lack risk-based
capital rules. To capture the risk of title insurance businesses, an
additional 300 percent risk weight would have been applied to title
insurance reserves. Additionally, title plants, which are collections
of data and records related to the titles of real property, would have
been deducted from available capital like other intangible assets in
the banking capital framework.
The Board received two comment letters on the treatment of title
insurance. These commenters did not oppose using the banking capital
rule to assess title insurance business. However, they suggested
modifying the treatment of title insurance reserves and title plant
assets. They argued that title insurance reserves should qualify as
tier 2 capital, that the 300 percent risk weight for title insurance
reserves was too high, and that title plant assets should not be
deducted from capital.
VII. Title Insurance Reserves
Commenters advocated including title insurance reserves in tier 2
capital and not applying a risk weight for two reasons. First, they
argued this would be more consistent with the banking capital rule
because title insurance reserves are analogous to banks' provisions for
credit losses. Banks may count these allowances as tier 2 capital,
subject to a limit of 1.25 percent of risk
[[Page 82962]]
weighted assets. Second, commenters argued this would encourage
conservative reserving.
The commenters also argued that the proposed 300 percent risk
weight for title insurance reserves was inappropriately high. They
claimed title insurance reserves are less risky than publicly traded
equities based on a comparison of industry-wide title insurance
reserves and returns of equity indices. They also argued that title
insurance policies and underwriting standards have evolved since the
financial crisis to make the industry less risky.
Based on an analysis of the comment letter and data, the final rule
maintains the proposed treatment of title insurance reserves. Insurance
reserves are substantively and significantly different than banks'
allowances. Allowances are a contra-asset that reflect expected future
reductions in asset cashflows; title insurance reserves are a liability
which represents expected future cash outflows. The reserves on other
insurance products are a better analogy. Insurance capital frameworks
unanimously classify insurance reserves as liabilities rather than
capital.
Indeed, many insurance capital frameworks, including NAIC RBC,
explicitly use very conservative reserving methodologies to safeguard
even more funds as liabilities. Commenters argued that this treatment
incentivizes underestimating reserves; however, there are actuarial
standards of practice that are followed by the vast majority of
actuaries when developing reserves estimates. Additionally, applying a
factor to a liability value is consistent with many other insurance
capital regimes. Independent of the BBA, reserves impact earnings,
taxes, executive compensation, and strategic business decisions. Some
members of management can have a short-term incentive to reduce
reserves to increase earnings, but internal controls help to protect
against this risk. Fear about these controls failing, which would
result in some reserves becoming capital, does not just justify
treating reserves like capital.
The final rule maintains the 300 percent factor for title insurance
reserves. During the financial crisis, the four largest title insurers'
reserves varied significantly more than equity indices. While the
financial crisis hit title insurers particularly hard, the percentage
losses on these reserves also exceeded the equity losses in any period,
including the Great Depression.
One of the four largest title insurers became insolvent. Another's
reserves more than doubled. A third's reserves increased by more than
50 percent. The industry-wide data from commenters underestimate the
potential volatility for individual companies. Data since 2011 on all
title insurers show that 10 percent reserve increases are somewhat
common even when industry-wide reserves are relatively stable.
VIII. Title Plant Assets
Commenters also argued that title plant assets, which are
collections of data and records related to the titles of real property,
should not be deducted from capital and should instead receive a risk
weight of 100 percent. They stated that title plant ownership interests
are readily transferable. Insurers and agents often transfer ownership
interests in title plants, which can be done without selling a
business. The commenters believed these transactions could be completed
even under adverse financial conditions.
The final rule deducts title plant assets from capital. During a
stress event, title plant assets would likely not be capable of
generating significant resources. The most likely buyers for an asset
which helps underwrite title insurance would be a title insurer. But if
one large title insurer needs capital, others are likely to require
capital as well. Even if a potentially willing and able buyer were
found, the transaction could face other difficulties, including
antitrust scrutiny. The title insurance industry is highly
concentrated. An attempted merger of two large title insurers in 2019
was abandoned after the Federal Trade Commission opposition on
antitrust grounds.\40\
---------------------------------------------------------------------------
\40\ See, <a href="https://www.sec.gov/edgar/searchedgar/companysearch">https://www.sec.gov/edgar/searchedgar/companysearch</a>
(Fidelity National Financial, Inc. Form 8-K Termination of Material
Definitive Agreement, Filed September 11, 2019 Fidelity National
Financial, Inc. Form 8-K).
---------------------------------------------------------------------------
IX. Scaling
Scaling was considered in the proposal because regulatory capital
frameworks differ in their outputs. While these outputs all assess
capital, some use radically different terminology and scales. Banking
capital frameworks focus on of risk weighted asset ratios, with
requirements set at levels well below 100 percent. Insurance capital
frameworks, in contrast, are set based on multiples of state
requirements and target ratios well above 100 percent. Aggregating
these different metrics requires translating (that is, ``scaling'')
them.
Because of scaling's importance to the BBA, the Board published a
white paper \41\ on it. The white paper explored scaling and assessed
different potential scaling methods. On the basis of the white paper's
assessment, the proposal would have based scaling between the Board's
banking capital rules and NAIC RBC based on historical default
probabilities. The proposed method used these default rates as a
benchmark for translation. The white paper's analysis indicated this
results in the most accurate translation of any method. Accurate
translations facilitate aggregation and ultimately the assessment of an
institution's safety and soundness.
---------------------------------------------------------------------------
\41\ Comparing Capital Requirements in Different Regulatory
Frameworks, September 2019, <a href="https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20190906a1.pdf">https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20190906a1.pdf</a>.
---------------------------------------------------------------------------
The proposal did not propose scalars for other jurisdictional
regimes at this time primarily due to a lack of consistent default
information. Instead, the proposal included a provisional scaling
method that would have applied in the absence of specified scalars.
This method assumed the equivalence of available capital calculations
and regulatory intervention points after an adjustment for country
risk.
Commenters largely agreed with the Board's analysis. Several
commenters explicitly supported the Board's proposed approach. These
commenters said the approach was thoughtful, rigorous, and practical.
No commenter explicitly disagreed with using it to translate between
NAIC RBC and the Federal banking capital rule. One commenter, did,
however raise concerns that the proposed approach was ``bank centric''
and overly dependent on default data from P&C insurance groups, which
may differ from data from other types of insurers.
The main criticism of the Board's overall scaling proposal was that
it supplies scalars only between two capital frameworks as described
above. Several commenters asked the Board to specify scalars for other
frameworks rather than relying on this provisional scaling method. They
argued that this would reduce uncertainty and aid international
negotiations. Because of the lack of default data on other frameworks,
these commenters also encouraged the Board to develop practical
alternatives to relying on default data. In addition to the comments on
developing scalars for other jurisdictions, the Board also received
comments on the provisional scaling method. One commenter argued that
this country risk adjustment disfavors international frameworks
relative to the U.S. framework. Another commenter disagreed with some
of the discussion in the white paper of the provisional methodology and
argued
[[Page 82963]]
that it did not adequately consider the possibility of interpolating a
scaling methodology from a single assumed equivalency point or the
possibility of using multiyear analysis to mitigate volatility. Another
commenter thought the proposed provisional scaling method was not as
sophisticated as what the NAIC is considering as part of its group
capital calculation. Those methods rely on an alternative assumption
related to the different insurance industries being equally well
capitalized.
After reviewing these comments, the Board is finalizing scalars
between NAIC RBC and the Board's banking capital rule as proposed. As
explained in the white paper, historical insolvency rates are a fair
benchmark for solvency ratios from different frameworks, and the
Board's testing did not indicate a bias toward either banks or
insurers. Extensive data exists on banks, P&C insurers, and life
insurers. This data did not support treating the life and P&C capital
frameworks differently.\42\
---------------------------------------------------------------------------
\42\ When parameterized separately, life and P&C insurance
frameworks generated nearly identical scalars. A t-test regarding
the differences in these parameters resulted in a p-value close to
50 percent. See page 18 of the White Paper for further information.
---------------------------------------------------------------------------
The Board considered and attempted to survey all potential scaling
methods in the published white paper. The Board's analysis revealed a
trade-off in scaling methods between the reasonableness of their
assumptions and the amount of data they required. Without data, scaling
requires using untested assumptions. No comment disputed this trade-
off.
Because more accurate scaling requires data and data is limited on
many frameworks, the Board could either vary its approach based on the
data available or exclusively use a framework that would rely on data
that is more likely to be available but would not provide scaling
results to sufficient degree of accuracy. The final rule, like the
proposal, avoids setting a uniform approach to scaling. This does
create some uncertainty about how foreign insurance frameworks would be
treated, but it also allows more accurate translations domestically. To
reduce the uncertainty, the Board will continue working with the NAIC
domestically, and at the IAIS internationally, on scaling, including
parameterizing scalars within the BBA as appropriate.
The final rule also adopts the provisional scaling methodology as
proposed for material foreign insurance entities. Other approaches may
produce more accurate translations, but they also require more data. A
provisional scaling method must always output a valid translation.
Without this, a SIO would not be able to compute its BBA ratio in the
absence of a further Board rulemaking or order. The proposed
methodology requires the least amount of data.
Additionally, the NAIC is currently using an unscaled approach in
its development of the GCC, which, like the provisional approach, would
leverage the capital requirements in jurisdictions with risk-based
regimes, though it does not include a country risk adjustment. The
final rule maintains this adjustment as country risk affects the
insurers operating in those jurisdictions.
With regard to the technical points made, the Board believes these
were accurately discussed in the white paper. One commenter noted that
changes to NAIC RBC could impact scalars and asked about the timeframe
for updates to the scalars and their effect time. The Board will
monitor changes to NAIC RBC and plans to update scalars as necessary
rather than on a predetermined schedule.
Proposed updates to the scalars will be released for public comment
prior to adoption.
X. Aggregation
The proposal would have aggregated the adjusted and scaled output
from the building block parents. At each level of aggregation, the
scaled and adjusted results from subsidiary building block parents
would have replaced the default treatment for these risks in the
indicated capital framework of the upstream building block parent. For
example, an insurance company that owns a depository institution would
have held this depository institution on its balance sheet based on
GAAP equity and applied a factor to this value to calculate the capital
required on the investment. When calculating available capital, the
proposal would have replaced the GAAP equity with the bank's scaled
capital, as calculated under the proposed BBA. Similarly, scaled and
adjusted output from the bank capital framework would have replaced the
insurance capital framework's treatment of the bank subsidiary.
The proposal would have used proportional consolidation to address
the partial ownership of building block parents. When aggregating the
risks of a downstream building block parent, the upstream building
block parent would have only included a fraction of the downstream
parent that is proportional to its ownership. In the proposal, this
proportion would have been based on the fraction of the capital
resources of the downstream building block parent owned by the upstream
building block parent.
The Board received one comment regarding this aspect of the
proposal. The commenter suggested using the proportion of equity in
place of the proportion of capital to allocate ownership of an
inventory company among multiple building block parents.
As suggested by the commenter, the final rule uses equity ownership
percentages to incorporate partially owned building block parents. This
fraction is calculated for other purposes and would simplify the rule
without materially impacting the calculation of the BBA ratio.\43\ The
final rule otherwise adopts the proposed method of aggregation under
the BBA.
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\43\ A top-tier depository institution holding company's BBA
ratio would be impacted by this change only if (1) a subsidiary
building block parent issued capital outside of the group, (2) the
subsidiary building block parent issued both equity and non-equity
capital instruments, and (3) the group's ownership percentage of the
non-equity capital instruments differed from its ownership of equity
capital instruments.
---------------------------------------------------------------------------
XI. Reporting
To implement the BBA, the Board proposed a new reporting form. This
reporting form, form FR Q-1 would have collected information needed to
carry out the BBA calculations.\44\ Form FR Q-1 would have facilitated
monitoring the capital position of companies subject to the BBA.
---------------------------------------------------------------------------
\44\ The adopted form FR Q-1 and instructions are available at
<a href="https://www.federalreserve.gov/apps/reportforms/review.aspx">https://www.federalreserve.gov/apps/reportforms/review.aspx</a>.
---------------------------------------------------------------------------
The Board published a proposed version of form FR Q-1 for comment
along with the NPR. This proposed reporting form served as the basis
for a voluntary QIS from SIOs. Several comment letters addressed form
FR Q-1. Additionally, QIS participants provided feedback based on their
experience completing the form.
Several issues raised in the context of form FR Q-1 overlap with
other aspects of the BBA and are discussed elsewhere in this
Supplementary Information section. As discussed above in section II
related to the BBA's effective date, several comments requested
deferring the first filing of form FR Q-1's attestation cover page to
avoid requiring controls related to the BBA to be in place before the
BBA becomes effective. The final rule defers the first filing of the
attestation cover page until the submission of the second form FR Q-1.
As discussed in section V.A related to the BBA's inventory, commenters
suggested the Board restrict the definition of an inventory company to
reduce form FR Q-1's burden. Instead, the adopted version of form FR Q-
1
[[Page 82964]]
limits the inventory companies that are required to provide asset
information to achieve a similar effect.
Commenters also raised issues regarding form FR Q-1's proposed
March 15 yearly deadline, the amount of form FR Q-1 information that
would be made public, and how much of the information related to form
FR Q-1 would need to be audited.
A. Submission Date
The proposal would have had a March 15 annual submission deadline
for form FR Q-1. This date was selected to closely follow the March 1
date on which state insurance legal entities must submit their annual
statements to state insurance regulators. Because the BBA relies on
information in these reports, form FR Q-1's deadline should occur after
it. A date shortly after this deadline was proposed because timely
information facilitates better supervision.
Commenters requested extending the submission deadline for form FR
Q-1. These commenters cited the burden of an additional reporting form
tied to the year-end. They suggested that form FR Q-1 be submitted
further back in the queue of these reports. June 1 was the most common
requested filing date, which would coincide with the date insurers must
submit audited financial statements. Commenters noted the additional
accuracy with these audited statements. Two other commenters suggested
slightly earlier dates.
In response to the comments, the final rule includes a March 31 due
date for form FR Q-1. This allows SIOs an extra two weeks to complete
the report in recognition of the report's reliance on U.S. statutory
financial statements that are filed with the states, and the existing
burden on reporting staff during this period of time. The final rule
does not, however, extend the deadline as much as suggested by
commenters. Doing so would significantly disrupt the Board's
supervision schedule and mean that the most recent BBA information
available would be between 5 and 17 months out of date. Conversely, for
other banking organizations, significantly more detailed consolidated
financial information is reported quarterly, around a month after the
close of a quarter.
B. Public Disclosure
Under the proposal, the vast majority of the information reported
to the Board through the proposed reporting form FR Q-1 would not have
been made public. The information that the Board proposed to make
public would have consisted of the building block available capital,
building block capital requirement, and BBA ratio for the top-tier
parent of an insurance depository institution holding company's
enterprise. This sought to protect some of the non-public information
contained within form FR Q-1 while still providing the public some
transparency into the capitalization of the firm, which could be used
as the basis for supervisory actions. The proposed disclosure was
significantly less extensive than the disclosure required for other
financial institutions because of the Board's limited role in
regulating supervised insurance institutions and the potential
competitive effects of requiring disclosure from only a small subset of
the sector.
Commenters expressed diverging opinions on the disclosure proposal.
One commenter supported the proposal. Three other commenters argued
that all aspects of the BBA should be confidential. They argued that
disclosing the BBA ratio could cause competitive disadvantages because
the NAIC does not intend to make public the results of their group
capital calculation.
The final rule adopts the proposed disclosure standard. The Board
will publish each SIO's overall results along with their numerator and
denominator. Although publishing detailed information on a supervised
institution, some of which is contained in form FR Q-1, could cause
competitive harm, publishing this overall BBA ratio and the numerator
and denominator would not. No trade secret information can be derived
from disclosing this high-level datum related to the overall
enterprise's capitalization. Outside of revealing confidential
information, the BBA ratio could place an SIO at a competitive
disadvantage if the ratio itself could be used against the company. A
very poor BBA ratio could be marketed against a company, but a very
poor BBA ratio likely could not be kept a secret regardless because it
results in supervisory consequences. For example, companies that breach
the BBA's minimum requirements will face limitations on capital
distributions that would be difficult to conceal. Additionally, it is
likely that for any SIO with a low BBA ratio, there would be publicly
available information indicating that some of the underlying building
blocks are thinly capitalized through either the published banking
capital ratios or the U.S. statutory filings. The net impact of the
disclosure then relates to the exact amount of the BBA ratio,
particularly when it is above the minimum. No commenter provided any
plausible avenue for how this could be used to harm an SIO.
C. Audit Requirements
The NPR was not clear about how much of the information entered
into form FR Q-1 would need to be subject to an independent audit.
However, it included a requirement that all BBA controls would be
subject to an internal audit annually. The proposal would have mandated
that building block parents calculate their available and required
capital under their indicated capital framework, but it did not specify
whether the source financial statements should be audited. The bank
rules referenced by the BBA do not clearly resolve the issue. There is
no universal financial statement audit requirement, although FDIC
regulations do require audited financial statements from depository
institutions over a certain asset threshold, and this audit can be
satisfied by an audit of the depository institution holding
company.\45\ Section 238.5 of the Board's Regulation MM also requires
audited financial statements for SLHCs with greater than $500 million
in consolidated assets.\46\
---------------------------------------------------------------------------
\45\ 12 CFR 363.1.
\46\ 12 CFR 238.5.
---------------------------------------------------------------------------
Commenters argued that an independent audit of financial statements
for each building block parent should not be required by the BBA or
form FR Q-1 instructions. They argued this would be burdensome, without
creating corresponding benefits. In relation to the proposed internal
audit requirement, one commenter argued that the requirement would be
overly burdensome and unnecessary on account of the requirement for a
senior officer to attest to the accuracy of form FR Q-1 and existence
of appropriate controls.
The final rule and form FR Q-1 instructions remove the proposed
internal audit requirement and clarify the Board's expectations for
independent audits of building block parent financial statements. While
the final rule does not require Internal audit coverage of form FR Q-1
each year, the Senior Officer in signing form FR Q-1 must attest that
related internal controls of the firm are considered adequate by
Internal audit.
As noted above, the proposal did not include an explicit audit
requirement for the underlying building blocks or for the enterprise,
and the Board has not adopted one in the final rule. However, the
safety and soundness considerations that justify the audit requirements
of 12 CFR 238.5 and in FDIC annual audit
[[Page 82965]]
rules \47\ apply to SIOs as well. Typically, the financial statements
of large companies, particularly those with $500 million or more in
consolidated assets, should be subject to an audit performed by a
qualified independent public accountant. This is particularly true of
large building block parents, whose financial statements would
typically be relied upon for this calculation and when making business
decisions. As with the financial statements of depository institutions
under the FDIC rule, this audit expectation could be fulfilled through
an audit of a holding company's financial statements if the holding
company consolidates the entity. In addition, U.S. statutory accounting
requirements (rules) have audit requirements for most insurance legal
entities. Between the banking requirements and the U.S. statutory
requirements, it is expected that most of the building block parents
will have audits.
---------------------------------------------------------------------------
\47\ See 12 CFR part 363.
---------------------------------------------------------------------------
The Board will monitor implementation of the BBA and determine if
there are audit gaps. If gaps are discovered, the Board would consider
implementing an audit requirement by independent public accountants of
financial statements of building block parents with total assets of
$500 million.
XII. Economic Impact Analysis of the BBA
The Board analyzed the potential costs and benefits of the proposed
minimum risk-based capital requirements for supervised insurance
holding companies. Setting the BBA at the similar stringency level as
bank capital requirements minimizes the incentive for BHCs to acquire
or sell insurance operations due to disparate capital requirements,
while maintaining the safety and soundness of supervised firms. The
Board analyzed whether the proposed level of the BBA requirements might
drive currently supervised firms to shed their depository institutions
or meaningful deter other insurers from acquiring thrifts, given that
the BBA's total capital requirement would be higher than any current
state requirements. Data from the BBA QIS, as of year-end 2018,
indicated that none of the currently supervised insurance institutions
would have needed to raise capital to comply with the rule. This was
confirmed to still be the case as of year-end 2021 based on analysis of
these firms' Statutory Insurance Annual Statements and data on
depository institutions and intermediate holding companies.
This same data was used to assess the distribution of Risk Based
Capital ratios relative to the BBA requirements for the universe of
insurers with over $1 billion in assets. Nearly nine in ten insurers
could meet the 400 percent total requirement without raising capital
and only 1 percent of insurers were below the proposed 250 percent
minimum. This demonstrates that the vast majority of insurers would not
be deterred by the BBA from acquiring thrifts by the BBA while
appropriately excluding the least capitalized insurers from doing so.
Parallel to the capital required by the BBA calculation, insurance
depository institution holding company would also have to demonstrate
capital adequacy on a fully consolidated basis as prescribed by section
171 of the Dodd-Frank Act. An SIO may comply with this requirement on a
fully consolidated basis using the bank capital requirements.
Alternatively, an SIO may utilize the flexibility afforded by the 2014
Amendment to exclude certain state- and foreign-regulated insurance
operations and to exempt top-tier insurance underwriting companies from
the risk-based capital requirement. The final rule allows SIOs to
utilize one of two different calculations that consider the section 171
calculation scope exceptions: full deduction from capital of investment
in subsidiaries or risk weighting of these investments at 400 percent,
consistent with the current treatment of bank's equity exposures. The
Board's analysis confirms that for most mutual insurance companies, the
parallel requirement would not be relevant. A significant percentage of
publicly traded companies would likely fail to meet the requirement
based on the deduction option, though most could satisfy the risk-
weight option. Overall, the parallel requirement would not have
material impact due to the different options for achieving compliance.
The BBA framework is designed to protect subsidiary insured
depository institutions from risks in the broader enterprise. The Board
analyzed the experience of insurance depository institution holding
companies during a significant stress period, the 2007-09 financial
crisis, to shed light on the potential benefits of an enterprise-wide
risk-based capital requirements. Prior to the financial crisis, more
than twenty holding companies would have been subject to enterprise-
wide capital requirements, had such a rule been in place, due to their
significant engagement in insurance activities. These combined assets
of these firms were over $3.3 trillion, according to data from forms FR
Y-9C and OTS 1313 (Thrift Financial Reports).
Depository institution subsidiaries tended to be a source of
strength for these insurers when some of them suffered significant
capital impairment at their non-banking subsidiaries. No depository
institution affiliates of insurers were resolved by the FDIC during the
2007-09 financial crisis. Banking-insurance combinations also enabled
some insurers to access emergency relief programs available to banks.
Three of these insurers received public assistance aimed at bolstering
their solvency, while six participated in Federal Reserve liquidity
facilities and seven increased their reliance on public liquidity
backstops. These included the largest three pre-crisis insurance
depository institution holding companies and in aggregate accounted for
about two-thirds of the total assets of this group.
Unlike regulations in place during the 2007-09 financial crisis,
the BBA provides a clear regulatory capital framework for insurers that
try to acquire depository institutions for the purposes of accessing
emergency facilities. Had it been in place, the BBA could have either
forced the insurers to raise capital before completing the transactions
or prevented such transactions due to a lack of consolidated capital.
In such a context, the BBA could help protect taxpayer funds by
ensuring the safety and soundness of insurers accessing emergency
facilities via a depository institution acquisition, since the insurer
would need to meet the BBA minimum requirement in order to do so. As
such, the consolidated BBA may lessen moral hazard associated with the
implicit government backstop seen in the financial crisis.
When the Federal Reserve assumed responsibility for supervision of
insurance SLHCs in mid-2011 there were 28 such firms. Fairly rapidly, a
majority of these firms left the Federal Reserve's regulatory purview,
either by converting their depository subsidiaries to trust banks or by
divesting from their thrifts entirely. These divestments could be
troubling if it implied that potentially synergistic mergers have been
discouraged. While it is difficult to precisely ascribe these
dissolutions to any particular factors, the Board's analysis relied on
financial comparisons and textual evidence to illuminate the likely
causes.
A quantitative comparison was conducted, using data collected by
the Office of Thrift Supervision leading up to the time of the handover
of supervisory responsibility to the Board,
[[Page 82966]]
between those firms keeping their depository institution subsidiaries
and those that either converted their depository subsidiaries to trust
banks or divested from their thrifts entirely. The firms that kept
their thrift subsidiaries tended to have banking as a larger share of
their overall business operations and to be more profitable. The firms
that de-thrifted tended to be riskier as measured by leverage and the
volatility of earnings.
Reviewing the record of banking-insurance combinations highlights
three drivers of de-thrifting that are tangential to the BBA capital
rule. First, most divestments preceded the development of the BBA.
While some insurers did cite regulatory concerns as a factor in their
decisions, they highlighted potential stress tests or distribution
restrictions rather than capital standards. Second, the economies of
scale envisioned from cross-selling banking and insurance products
failed to materialize. Finally, the small size of the thrifts at most
insurance SLHCs suggest an additional headwind. Economies of scale from
technological advances and the loosening of branching restrictions have
long raised competitive difficulties for small depository institutions
that are unrelated to any specific requirements of the BBA. It is clear
from the analysis that the development of the BBA was not the driver of
insurers divesting or switching charters. Further, the primary aim of
the rule, protecting insured depository subsidiaries from risks in the
broader enterprise, fits with the pattern of the riskiest firms
divesting their banks while those who maintain them have banking as a
major business line, are well capitalized, and operate at low risk
levels.
The BBA capital rule is more stringent than state level insurance
regulation in that it entails swifter regulatory intervention should
capital deteriorate. The Board quantified this comparative stringency
using data collected through the QIS for the firms in the Board's
supervisory portfolio. Intervention probabilities over a three-year
horizon were estimated based on how BBA ratios, projected back over the
prior two decades, have compared against the required capital plus the
buffer. Relative to a firm's respective state-level requirement,
threshold breach probabilities were on average about four percentage
points higher under the BBA, though this varied form near zero to over
10 percent. This demonstrates that the BBA capital rule is consistently
more conservative than state-level requirements, enhancing protection
of the insured depository subsidiaries. Regulatory interventions, to
the extent they reduce the ability to do business or require additional
compliance resources, can impose costs on firms. In practice, firms
with higher intervention probabilities based on their current
financials may raise their capital levels to forestall the need for
regulatory intervention.
In addition to somewhat higher capital requirements, supervised
insurance holding companies would also see two notable differences in
how their capital levels are determined relative to state-level
regulations, both of which are intended to enhance the quality of
capital.
First, captive reinsurers are consolidated under the same
accounting standards as U.S. operating insurance entities rather than
being permitted to back some policy reserves with lower- quality
assets. Such a treatment could put insurers covered by the BBA at a
competitive disadvantage by necessitating higher premiums on certain
products. The effect on currently supervised firms would be small given
their limited use of captive reinsurance. The Board's calculations
suggest about one-fifth of life insurers by assets industry-wide would
not have sufficient capital to meet the BBA capital conservation buffer
without the relief provided by captives, potentially deterring their
interest in acquiring a depository institution. Because this form of
capital relief derives from a corporate structure choice rather than
actual risk differences, it would be counter to the principle that the
same activity should get the same regulatory treatment.
Second, the share of insurer capital that can be accounted for by
surplus notes is capped.
While the NAIC considers these instruments as capital, they are a
form of unsecured subordinated debt with fixed payment schedules. In
principle, heavy users of surplus notes would be disincentivized from
acquiring a depository institution given the need to raise more costly
forms of capital. The impact in practice is expected to be minimal
given the stipulation under the BBA legacy treatment of existing
surplus notes as a qualifying capital instrument.
Further, the Board's analysis found that the incremental difference
in the share of firms industry-wide who would not meet the BBA's
regulatory thresholds is not meaningfully different with the use of
surplus notes capped.
XIII. Administrative Law Matters
A. Paperwork Reduction Act
In connection with the final rule, the Board is implementing
``collections of information'' within the meaning of the Paperwork
Reduction Act of 1995 (PRA) (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the Board may not conduct or sponsor, and
a respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(OMB) control number. The OMB control number is 7100-NEW. The Board
reviewed the final rule under the authority delegated to the Board by
OMB.
In order to implement the final rule, the Board is implementing the
FR Q-1 reporting form, which contains reporting requirements subject to
the PRA. The reporting form has been implemented pursuant to section
171 of the Dodd-Frank Act and section 10 of HOLA for insurance
depository institution holding companies. The Board received no
comments specifically related to the PRA. The Board did receive two
comments, as described above, relating to the difficulties of providing
certain information for all subsidiaries. The Board lowered the
reporting burden by adding a materiality threshold that will eliminate
some of the reporting on immaterial inventory companies.
Implementation of the Following Information Collection
Collection title: Capital Requirements for Board-regulated
Institutions Significantly Engaged in Insurance Activities.
Collection identifier: FR Q-1.
OMB control number: 7100-NEW.
General description of report: Section 171 of the Dodd-Frank Act
requires, and section 10 of the HOLA authorizes, the Board to implement
risk-based capital requirements for depository institution holding
companies, including those that are significantly engaged in insurance
activities.
Frequency: Annual.
Affected Public: Businesses or other for-profit.
Respondents: Insurance depository institution holding companies.
Estimated number of respondents: 5.
Estimated average hours per response: 175.50 for initial setup and
43.88 for ongoing compliance.
Estimated annual burden hours: 1,097 (878 for initial setup and 219
for ongoing compliance).
Current Actions: Pursuant to section 171 of the Dodd-Frank Act and
section 10 of HOLA, the Board has adopted the
[[Page 82967]]
application of risk-based capital requirements to certain depository
institution holding companies. The Board has adopted an aggregation-
based approach, the Building Block Approach, that would aggregate
capital resources and capital requirements across the different legal
entities under an insurance depository institution holding company to
calculate consolidated, enterprise-wide qualifying and required
capital. The BBA utilizes, to the greatest extent possible, capital
frameworks already in place for the entities in the enterprise of a
depository institution holding company significantly engaged in
insurance activities and is tailored to the supervised firm's business
model, capital structure, and risk profile. The new reporting form (FR
Q-1) requires a depository institution holding company to produce
certain information required for the application of the BBA. The
reporting form and instructions are available on the Board's public
website at <a href="https://www.federalreserve.gov/apps/reportingforms/home/review">https://www.federalreserve.gov/apps/reportingforms/home/review</a>.
The Board made several changes to form FR Q-1 and the FR Q-1
instructions that correspond with changes to the final rule. The
changes include the addition of a new column for additional tier 1
capital, revising the tier 2 limit, the materiality calculation for
reporting requirement on inventory companies, a simplification on how
building blocks are aggregated, and the inclusion of a request for
confidentiality check box. One additional change was made to include a
column to list the Legal Entity Identifier for inventory companies,
which allows for more consistent identification of legal entities. The
changes in the aggregate are a reduction in the burden from the
proposed FR Q-1. Form FR Q-1 is effective January 1, 2024.
B. Regulatory Flexibility Act
An initial regulatory flexibility analysis was included in the
proposal in accordance with section 603(a) of the Regulatory
Flexibility Act (RFA).\48\ In the initial regulatory flexibility
analysis, the Board requested comment on the effect of the proposed
rule on small entities and on any significant alternatives that would
reduce regulatory burden on small entities. The Board did not receive
any comments on the initial regulatory flexibility analysis. The RFA
requires an agency to prepare a final regulatory flexibility analysis
unless the agency certifies that the rule will not, if promulgated,
have a significant economic impact on a substantial number of small
entities. Based on its analysis, and for the reasons stated below, the
Board certifies that the rule will not have a significant economic
impact on a substantial number of small entities.\49\ In accordance
with section 171 of the Dodd-Frank Act and section 10 of HOLA, the
Board is adopting subpart J to 12 CFR part 217 (Regulation Q) to
establish risk-based capital requirements for insurance depository
institution holding companies.\50\ An insurance depository institution
holding company's aggregate capital requirements generally are the sum
of the capital requirements applicable to the top tier parent and
certain subsidiaries of the insurance depository institution holding
company, where the capital requirements for regulated financial
subsidiaries are based on the regulatory capital rules of the
subsidiaries' functional regulators--whether a state Department of
Insurance or a foreign insurance regulator for insurance subsidiaries,
or a Federal banking regulator for insured depository institutions
(IDIs). The BBA then builds upon and aggregates capital resources and
requirements across groups of legal entities in the insurance
depository institution holding company's enterprise (insurance, non-
insurance financial, non-financial, and holding company), subject to
adjustments.
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\48\ 5 U.S.C. 601 et seq.
\49\ 5 U.S.C. 605(b).
\50\ See 12 U.S.C. 1467a and 5371.
---------------------------------------------------------------------------
Under Small Business Administration (SBA) regulations, the finance
and insurance sector includes direct life insurance carriers, direct
title insurance carriers, and direct P&C insurance carriers, which
generally are considered ``small'' for the purposes of the RFA if a
life insurance carrier or title insurance carrier has average annual
receipts of $47 million or less or if a P&C insurance carrier has less
than 1,500 employees.\51\
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\51\ 13 CFR 121.201. Consistent with the SBA's General
Principles of Affiliation, the Board includes the assets of all
domestic and foreign affiliates toward the applicable size threshold
when determining whether to classify a particular entity as a small
entity. See 13 CFR 121.103.
---------------------------------------------------------------------------
Life insurance companies and title insurance companies that are
subject to the rule all substantially exceed the $47 million average
annual receipt threshold at which they would be considered a ``small
entity'' under SBA regulations. P&C insurance companies subject to the
rule exceed the less than 1,500 employee threshold below which a P&C
entity is considered a ``small entity'' under SBA regulations.
Because the rule does not apply to any life insurance carrier or
title insurance carrier with average annual receipts of less than $47
million, or P&C carrier with less than 1,500 employees, it will not
apply to a substantial number of small entities for purposes of the
RFA. Accordingly, the Board does not expect the rule to have a
significant economic impact on a substantial number of small entities.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \52\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The Board sought to present the
proposal in a simple and straightforward manner and did not receive any
comments on the use of plain language.
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\52\ 12 U.S.C. 4809.
---------------------------------------------------------------------------
List of Subjects
12 CFR Part 217
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Investments, National banks,
Reporting and recordkeeping requirements, Securities.
12 CFR Part 238
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 252
Administrative practice and procedure, Banks, banking, Credit,
Federal Reserve System, Holding companies, Investments, Qualified
financial contracts, Reporting and recordkeeping requirements,
Securities.
Authority and Issuance
For the reasons set forth in the preamble, the Board of Governors
of the Federal Reserve System amends chapter II of title 12 of the Code
of Federal Regulations as follows:
PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)
0
1. The authority citation for part 217 continues to read as follows:
Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a,
1818, 1828, 1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1851, 3904,
3906-3909, 4808, 5365, 5368, 5371, 5371 note, and sec. 4012, Pub. L.
116-136, 134 Stat. 281.
Subpart A--General Provisions
0
2. In Sec. 217.1:
[[Page 82968]]
0
a. Revise paragraph (c)(1); and
0
b. Add paragraph (g).
The revision and addition read as follows:
Sec. 217.1 Purpose, applicability, reservations of authority, and
timing.
* * * * *
(c) * * *
(1)(i) Applicability in general. This part applies on a
consolidated basis to every Board-regulated institution that is:
(A) A state member bank;
(B) A bank holding company domiciled in the United States that is
not subject to 12 CFR part 225, appendix C, provided that the Board may
by order apply any or all of this part to any bank holding company,
based on the institution's size, level of complexity, risk profile,
scope of operations, or financial condition; or
(C) A covered savings and loan holding company domiciled in the
United States, other than a savings and loan holding company that meets
the requirements of 12 CFR part 225, appendix C, as if the savings and
loan holding company were a bank holding company and the savings
association were a bank. For purposes of compliance with the capital
adequacy requirements and calculations in this part, savings and loan
holding companies that do not file form FR Y-9C or form FR Q-1 should
follow the instructions to the FR Y-9C.
(ii) Mid-tier holding companies of insurance depository institution
holding companies. In the case of a bank holding company, or a covered
savings and loan holding company, that does not calculate minimum risk-
based capital requirements under subpart B of this part by operation of
Sec. 217.10(f)(1), this part applies to a depository institution
holding company that is a subsidiary of such bank holding company or
covered savings and loan holding company, provided that:
(A) The subsidiary depository institution holding company is an
insurance mid-tier holding company; and
(B) The subsidiary depository institution holding company's assets
and liabilities are not consolidated with those of a depository
institution holding company that controls the subsidiary for purposes
of determining the parent depository institution holding company's
capital requirements and capital ratios under subparts B through F of
this part.
* * * * *
(g) Depository institution holding companies and treatment of
subsidiary state-regulated insurers, regulated foreign subsidiaries,
and regulated foreign affiliates--(1) In general. In complying with the
capital adequacy requirements of this part (except for the requirements
and calculations of subpart J of this part), including any
determination of applicability under Sec. 217.100 or Sec. 217.201, an
insurance bank holding company, insurance savings and loan holding
company, or insurance mid-tier holding company may elect not to
consolidate the assets and liabilities of its subsidiary state-
regulated insurers, regulated foreign subsidiaries, and regulated
foreign affiliates. Such an institution that makes this election must
either:
(i) Deduct from the sum of its common equity tier 1 capital
elements the aggregate amount of its outstanding equity investment,
including retained earnings, in such subsidiaries and affiliates; or
(ii) Include in the risk-weighted assets of the Board-regulated
institution the aggregate amount of its outstanding equity investment,
including retained earnings, in such subsidiaries and affiliates and
assign to these assets a 400 percent risk weight.
(2) Method of election. (i) An insurance bank holding company,
insurance savings and loan holding company, or insurance mid-tier
holding company may make the election described in paragraph (g)(1) of
this section by indicating that it has made this election on the
applicable regulatory report, filed by the insurance bank holding
company, insurance savings and loan holding company, or insurance mid-
tier holding company for the first reporting period in which it is an
insurance bank holding company, insurance savings and loan holding
company, or insurance mid-tier holding company. The electing Board-
regulated institution must indicate on the applicable regulatory report
whether it elects to deduct from the sum of its common equity tier 1
capital elements in accordance with paragraph (g)(1)(i) of this section
or whether it elects to include an amount in its risk-weighted assets
in accordance with paragraph (g)(1)(ii) of this section.
(ii) An insurance bank holding company, insurance savings and loan
holding company, or insurance mid-tier holding company that has not
made an effective election pursuant to paragraph (g)(2)(i) of this
section, or that seeks to change its election (or its choice of
treatment under paragraph (g)(1) of this section) due to a change in
control, business combination, or other legitimate business purpose,
may do so only with the prior approval of the Board, effective as of
the first reporting period after the period in which the Board approves
the election, or such other date specified in the approval.
0
3. In Sec. 217.2:
0
a. Revise the definition of ``Covered savings and loan holding
company''; and
0
b. Add the definitions of ``Insurance bank holding company,''
``Insurance mid-tier holding company'', ``Insurance savings and loan
holding company'', ``Regulated foreign subsidiary and regulated foreign
affiliate'', and ``State-regulated insurer'' in alphabetical order.
The revision and additions read as follows:
Sec. 217.2 Definitions.
* * * * *
Covered savings and loan holding company means a top-tier savings
and loan holding company other than an institution that--
(1) Meets the requirements of section 10(c)(9)(C) of the Home
Owners' Loan Act (12 U.S.C. 1467a(c)(9)(C)); and
(2) As of June 30 of the previous calendar year, derived 50 percent
or more of its total consolidated assets or 50 percent of its total
revenues on an enterprise-wide basis (as calculated under GAAP) from
activities that are not financial in nature under section 4(k) of the
Bank Holding Company Act (12 U.S.C. 1843(k)).
* * * * *
Insurance bank holding company means:
(1)(i) A bank holding company that is an insurance underwriting
company; or
(ii) A bank holding company that, as of June 30 of the previous
calendar year, held 25 percent or more of its total consolidated assets
in subsidiaries that are insurance underwriting companies (other than
assets associated with insurance underwriting for credit risk).
(2) For purposes of this definition, the company must calculate its
total consolidated assets in accordance with GAAP, or if the company
does not calculate its total consolidated assets under GAAP for any
regulatory purpose (including compliance with applicable securities
laws), the company may estimate its total consolidated assets, subject
to review and adjustment by the Board.
Insurance mid-tier holding company means a bank holding company, or
savings and loan holding company, domiciled in the United States that:
(1) Is a subsidiary of:
(i) An insurance bank holding company to which subpart J of this
part applies; or
(ii) An insurance savings and loan holding company to which subpart
J of this part applies; and
[[Page 82969]]
(2) Is not an insurance underwriting company that is subject to
state law capital requirements.
Insurance savings and loan holding company means:
(1)(i) A top-tier savings and loan holding company that is an
insurance underwriting company; or
(ii) A top-tier savings and loan holding company that, as of June
30 of the previous calendar year, held 25 percent or more of its total
consolidated assets in subsidiaries that are insurance underwriting
companies (other than assets associated with insurance underwriting for
credit risk).
(2) For purposes of this definition, the company must calculate its
total consolidated assets in accordance with GAAP, or if the company
does not calculate its total consolidated assets under GAAP for any
regulatory purpose (including compliance with applicable securities
laws), the company may estimate its total consolidated assets, subject
to review and adjustment by the Board.
* * * * *
Regulated foreign subsidiary and regulated foreign affiliate means
a person described in section 171(a)(6) of the Dodd-Frank Act (12
U.S.C. 5371(a)(6)) and any subsidiary of such a person other than a
state-regulated insurer.
* * * * *
State-regulated insurer means a person regulated by a state
insurance regulator as defined in section 1002(22) of the Dodd-Frank
Act (12 U.S.C. 5481(22)), and any subsidiary of such a person, other
than a regulated foreign subsidiary and regulated foreign affiliate.
* * * * *
Subpart B--Capital Ratio Requirements and Buffers
0
4. In Sec. 217.10, add paragraph (f) to read as follows:
Sec. 217.10 Minimum capital requirements.
* * * * *
(f) Insurance depository institution holding companies.
Notwithstanding paragraphs (a) through (d) of this section:
(1) An insurance bank holding company that is a state-regulated
insurer, or an insurance savings and loan holding company that is a
state-regulated insurer, is not required to meet the minimum capital
ratio requirements in paragraphs (a)(1)(i) through (iii) of this
section if the company is subject to subpart J of this part; and
(2) A Board-regulated institution that is an insurance bank holding
company, insurance savings and loan holding company, or insurance mid-
tier holding company is not required to meet the minimum capital ratio
requirements in paragraphs (a)(1)(iv) and (v) of this section.
0
5. In Sec. 217.11, add paragraph (e) to read as follows:
Sec. 217.11 Capital conservation buffer, countercyclical capital
buffer amount, and GSIB surcharge.
* * * * *
(e) Insurance depository institution holding companies.
Notwithstanding any other provision of this section:
(1) A Board-regulated institution that is an insurance bank holding
company that is subject to subpart J of this part calculates its
capital conservation buffer in accordance with Sec. 217.604;
(2) A Board-regulated institution that is an insurance savings and
loan holding company that is subject to subpart J of this part
calculates its capital conservation buffer in accordance with Sec.
217.604; and
(3) A Board-regulated institution that is an insurance mid-tier
holding company is not subject to the provisions of this section.
Subpart G--Transitional Provisions
0
6. Add Sec. 217.306 to read as follows:
Sec. 217.306 Building Block Approach (BBA) capital conservation
buffer transition.
(a) Notwithstanding any provision of this part and subject to
paragraph (b) of this section, an insurance bank holding company, or
insurance savings and loan holding company, that, on January 1, 2023,
was not subject to this part is not subject to any restrictions on
distributions or discretionary bonus payments under Sec. Sec. 217.11
and 217.604.
(b) This section ceases to be effective after March 31, 2026.
0
7. Add subpart J to read as follows:
Subpart J--Risk-Based Capital Requirements for Board-Regulated
Institutions Significantly Engaged in Insurance Activities
Sec.
217.601 Purpose, applicability, and reservations of authority.
217.602 Definitions.
217.603 BBA ratio and minimum requirements.
217.604 Capital conservation buffer.
217.605 Determination of building blocks.
217.606 Scaling parameters.
217.607 Capital requirements under the Building Block Approach.
217.608 Available capital resources under the Building Block
Approach.
Sec. 217.601 Purpose, applicability, and reservations of authority.
(a) Purpose. This subpart establishes a framework for assessing
overall risk-based capital for Board-regulated institutions that are
significantly engaged in insurance activities. The framework in this
subpart is used to measure available capital resources and capital
requirements across a Board-regulated institution and its subsidiaries
that are subject to diverse capital frameworks, aggregate available
capital resources and capital requirements and calculate a ratio that
reflects the overall capital adequacy of the Board-regulated
institution.
(b) Applicability. This subpart applies to every Board-regulated
institution that is:
(1) A top-tier depository institution holding company that is an
insurance underwriting company; or
(2) A top-tier depository institution holding company, that, as of
June 30 of the previous calendar year, held 25 percent or more of its
total consolidated assets in insurance underwriting companies (other
than assets associated with insurance underwriting for credit risk).
For purposes of this paragraph (b)(2), the Board-regulated institution
must calculate its total consolidated assets in accordance with GAAP,
or if the Board-regulated institution does not calculate its total
consolidated assets under GAAP for any regulatory purpose (including
compliance with applicable securities laws), the company may estimate
its total consolidated assets, subject to review and adjustment by the
Board; or
(3) Depository institution holding company in a supervised
insurance organization; or
(4) An institution that is otherwise made subject to this subpart
by the Board.
(c) Exclusion of certain depository institution holding companies.
Notwithstanding paragraph (b) of this section, this subpart does not
apply to a top-tier depository institution holding company that--
(1) Exclusively files financial statements in accordance with
Statutory Accounting Principles (SAP);
(2) Is not subject to a state insurance capital requirement; and
(3) Has no subsidiary depository institution holding company that--
(i) Is subject to a capital requirement; or
(ii) Does not exclusively file financial statements in accordance
with SAP.
(d) Reservation of authority--(1) Regulatory capital resources. (i)
If the Board determines that a particular company capital element has
[[Page 82970]]
characteristics or terms that diminish its ability to absorb losses, or
otherwise present safety and soundness concerns, the Board may require
the supervised insurance organization to exclude all or a portion of
such element from building block available capital for a depository
institution holding company in the supervised insurance organization.
(ii) Notwithstanding any provision of Sec. 217.608, the Board may
find that a capital resource may be included in the building block
available capital of a depository institution holding company on a
permanent or temporary basis consistent with the loss absorption
capacity of the capital resource and in accordance with Sec.
217.608(g).
(2) Required capital amounts. If the Board determines that the
building block capital requirement for any depository institution
holding company is not commensurate with the risks of the depository
institution holding company, the Board may adjust the building block
capital requirement and building block available capital for the
supervised insurance organization.
(3) Structural requirements. In order to achieve the appropriate
application of this subpart, the Board may require a supervised
insurance organization to take any of the following actions with
respect to the application of this subpart, if the Board determines
that such action would better reflect the risk profile of an inventory
company or the supervised insurance organization:
(i) Identify components under this subpart differently than as done
by the supervised insurance organization. This could include a
different identification of a top-tier depository institution holding
company, an inventory company, a material financial entity, or a
building block parent, then that made by the supervised insurance
organization; or
(ii) Set a building block parent's allocation share of a downstream
building block parent equal to 100 percent.
(4) Other reservation of authority. With respect to any treatment
required under this subpart, the Board may require a different
treatment, provided that such alternative treatment is commensurate
with the supervised insurance organization's risk and consistent with
safety and soundness.
(e) Notice and response procedures. In making any determinations
under paragraph (d) of this section, the Board will apply notice and
response procedures in the same manner as the notice and response
procedures in Sec. 263.202 of this chapter.
Sec. 217.602 Definitions.
(a) Terms that are set forth in Sec. 217.2 and used in this
subpart have the definitions assigned thereto in Sec. 217.2.
(b) For the purposes of this subpart, the following terms are
defined as follows:
Allocation share means the portion of a downstream building block's
available capital or building block capital requirement that a building
block parent must aggregate in calculating its own building block
available capital or building block capital requirement, as applicable,
and calculated in accordance with Sec. 217.605(d).
Assignment means the process of associating an inventory company
with one or more building block parents for purposes of inclusion in
the building block parents' building blocks.
BBA ratio is defined in Sec. 217.603.
Building block means a building block parent and all downstream
companies and subsidiaries assigned to the building block parent.
Building block available capital has the meaning set out in Sec.
217.608.
Building block capital requirement has the meaning set out in Sec.
217.607.
Building block parent means the lead company of a building block
whose indicated capital framework must be applied to all members of a
building block for purposes of determining building block available
capital and the building block capital requirement.
Capital-regulated company means a company that is--
(i) A depository institution, foreign bank, or company engaged in
the business of insurance in a supervised insurance organization; and
(ii) Directly subject to a regulatory capital framework.
Common capital framework means NAIC RBC.
Company available capital means, for a company, the amount of its
capital elements, net of any adjustments and deductions, as determined
in accordance with the company's indicated capital framework.
Company capital element means any part, item, component, balance
sheet account, instrument, or other element qualifying as regulatory
capital under a company's indicated capital framework prior to any
adjustments and deductions under that framework.
Company capital requirement means:
(i) For a company whose indicated capital framework is NAIC RBC,
the Authorized Control Level risk-based capital requirement as set
forth in NAIC RBC;
(ii) For a company whose indicated capital framework is a U.S.
Federal banking capital rule, the total risk-weighted assets; and
(iii) For any other company, a risk-sensitive measure of required
capital used to determine the jurisdictional intervention point
applicable to that company.
Downstream building block parent means a building block parent that
is a downstream company of another building block parent.
Downstream company means a company whose company capital element is
directly or indirectly owned, in whole or in part, by another company
in the supervised insurance organization.
Downstreamed capital means direct ownership of a downstream
company's company capital element that is accretive to a downstream
building block parent's building block available capital. When
calculating building block available capital, the amount of the
downstreamed capital is calculated as the amount, excluding any impact
on taxes, of the company available capital of the building block parent
of the upstream building block, if the owner were to deduct the
downstreamed capital.
Financial entity means:
(i) A bank holding company; a savings and loan holding; a U.S.
intermediate holding company established or designated for purposes of
compliance with part 252 of this chapter;
(ii) A depository institution as defined in section 3(c) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that
is organized under the laws of a foreign country and that engages
directly in the business of banking outside the United States; a
Federal credit union or state credit union; a national association,
state member bank, or state nonmember bank that is not a depository
institution; an institution that functions solely in a trust or
fiduciary capacity; an industrial loan company, an industrial bank, or
other similar institution;
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money
lender; installment lender; consumer lender or lending company;
mortgage lender, broker, or bank; motor vehicle title pledge lender;
payday or deferred deposit lender; premium finance company; commercial
finance or lending company; or commercial mortgage company; except
entities registered or licensed solely on account of financing the
entity's direct sales of goods or services to customers; or
(B) A money services business, including a check casher; money
transmitter; currency dealer or
[[Page 82971]]
exchange; or money order or traveler's check issuer;
(iv) Any person registered with the Commodity Futures Trading
Commission as a swap dealer or major swap participant pursuant to the
Commodity Exchange Act (7 U.S.C. 1 et seq.), or an entity that is
registered with the U.S. Securities and Exchange Commission as a
security-based swap dealer or a major security-based swap participant
pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et
seq.);
(v) A securities holding company as defined in section 618 of the
Dodd-Frank Act (12 U.S.C. 1850a); a broker or dealer as defined in
sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(4)-(5)); an investment company registered with the U.S.
Securities and Exchange Commission under the Investment Company Act of
1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be
regulated as a business development company pursuant to section 54(a)
of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
(vi) A private fund as defined in section 202(a) of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an
investment company under section 3 of the Investment Company Act of
1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C) of that Act; or an
entity that is deemed not to be an investment company under section 3
of the Investment Company Act of 1940 pursuant to 17 CFR 270.3a-7
(Investment Company Act Rule 3a-7 of the U.S. Securities and Exchange
Commission);
(vii) A commodity pool, a commodity pool operator, or a commodity
trading advisor as defined, respectively, in sections 1a(10), 1a(11),
and 1a(12) of the Commodity Exchange Act (7 U.S.C. 1a(10), 1a(11), and
1a(12)); a floor broker, a floor trader, or introducing broker as
defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the
Commodity Exchange Act (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a
futures commission merchant as defined in section 1a(28) of the
Commodity Exchange Act (7 U.S.C. 1a(28));
(viii) An entity that is organized as an insurance company,
primarily engaged in underwriting insurance or reinsuring risks
underwritten by insurance companies;
(ix) Any designated financial market utility, as defined in section
803 of the Dodd-Frank Act (12 U.S.C. 5462); and
(x) An entity that would be a financial entity described in
paragraphs (i) through (ix) of this definition, if it were organized
under the laws of the United States or any State thereof.
Indicated capital framework is defined in Sec. 217.605, provided
that for purposes of Sec. 217.605(b)(2), the NAIC RBC frameworks for
life insurance and fraternal insurers, property and casualty (P&C)
insurance, and health insurance companies are different indicated
capital frameworks.
Inventory company means a company identified pursuant to Sec.
217.605(b)(1).
Material means, for a company in the supervised insurance
organization:
(i) Where the top-tier depository institution holding company's
total exposure to the company exceeds 5 percent of the maximum of--
(A) Top-tier depository institution holding company's company
available capital; and
(B) The largest company available capital of all capital regulated
companies reported in the supervised insurance organization's
inventory; or
(ii) The company is otherwise significant when assessing the
building block available capital or building block capital requirement
of the top-tier depository institution holding company based on factors
including risk exposure, activities, organizational structure,
complexity, affiliate guarantees or recourse rights, and size.
(iii) For purposes of this definition, total exposure includes:
(A) The absolute value of the top-tier depository institution
holding company's direct or indirect interest in the company capital
elements of the company;
(B) The maximum possible loss from a guarantee (explicit or
implicit) the top-tier depository institution holding company or any
other company in the supervised insurance organization provides for the
benefit of the company; and
(C) Maximum potential counterparty credit risk to the top-tier
depository institution holding company or any other company in the
supervised insurance organization arising from any derivative or
similar instrument, reinsurance or similar arrangement, or other
contractual agreement.
Material financial entity means a financial entity that, together
with its subsidiaries, but excluding any subsidiary capital-regulated
company (or subsidiary thereof), is material, provided that an
inventory company is not eligible to be a material financial entity if:
(i) The supervised insurance organization has elected pursuant to
Sec. 217.605(c) not to treat the company as a material financial
entity; or
(ii) The inventory company is a financial subsidiary, as defined in
section 121 of the Gramm-Leach-Bliley Act.
Member means, with respect to a building block, the building block
parent or any of its downstream companies or subsidiaries that have
been assigned to a building block.
NAIC means the National Association of Insurance Commissioners.
NAIC RBC means the most recent version of the Risk-Based Capital
(RBC) For Insurers Model Act, together with the RBC instructions, as
adopted in a substantially similar manner by an NAIC member and
published in the NAIC's Model Regulation Service.
Permitted accounting practice means an accounting practice,
specifically requested by a state-regulated insurer, that departs from
SAP and state prescribed accounting practices and has been approved by
the state-regulated insurer's domiciliary state regulatory authority.
Prescribed accounting practice means an accounting practice that is
incorporated directly or by reference to state laws, regulations, and
general administrative rules applicable to all insurance companies
domiciled in a particular state.
Principles based reserving (PBR) means the valuation standard
adopted for certain life insurance reserves by the NAIC effective as of
January 1, 2020.
Recalculated building block capital requirement means, for a
downstream building block parent and an upstream building block parent,
the downstream building block parent's building block capital
requirement recalculated assuming that the downstream building block
parent had no upstream investment in the upstream building block
parent.
Regulatory capital framework means, with respect to a company, the
applicable legal requirements, excluding this subpart, specifying the
minimum amount of total regulatory capital the company must hold to
avoid restrictions on distributions and discretionary bonus payments,
regulatory intervention on the basis of capital adequacy levels for the
company, or equivalent standards; provided that the NAIC RBC frameworks
for life and fraternal insurance, P&C insurance, and health insurance
companies are different regulatory capital frameworks.
SAP means Statutory Accounting Principles as promulgated by the
NAIC and adopted by a jurisdiction for purposes of financial reporting
by insurance companies.
Scaling means the translation of building block available capital
and
[[Page 82972]]
building block capital requirement from one indicated capital framework
to another by application of Sec. 217.606.
Scalar compatible means a capital framework:
(i) For which the Board has determined scalars; or
(ii) That is an insurance capital regulatory framework, and
exhibits each of the following three attributes:
(A) The framework is clearly defined and broadly applicable;
(B) The framework has an identifiable regulatory intervention point
that can be used to calibrate a scalar; and
(C) The framework provides a risk-sensitive measure of required
capital reflecting material risks to a company's financial strength.
Submission date means the date as of which form FR Q-1 is filed
with the Board.
Supervised insurance organization means:
(i) In the case of a depository institution holding company, the
set of companies consisting of:
(A) A top-tier depository institution holding company that is an
insurance underwriting company, together with its inventory companies;
or
(B) A top-tier depository institution holding company, together
with its inventory companies, that, as of June 30 of the previous
calendar year, held 25 percent or more of its total consolidated assets
in insurance underwriting companies (other than assets associated with
insurance underwriting for credit risk). For purposes of this paragraph
(i)(B), the supervised firm must calculate its total consolidated
assets in accordance with GAAP, or if the firm does not calculate its
total consolidated assets under GAAP for any regulatory purpose
(including compliance with applicable securities laws), the company may
estimate its total consolidated assets, subject to review and
adjustment by the Board; or
(ii) An institution that is otherwise subject to this subpart, as
determined by the Board, together with its inventory companies.
Tier 2 capital instruments has the meaning set out in Sec.
217.608(a).
Top-tier depository institution holding company means a depository
institution holding company that is not controlled by another
depository institution holding company.
Upstream building block parent means an upstream company that is a
building block parent.
Upstream company means a company within a supervised insurance
organization that directly or indirectly controls a downstream company,
or directly or indirectly owns part or all of a downstream company's
company capital elements.
Upstream investment means any direct or indirect investment by a
downstream building block parent in an upstream building block parent.
When calculating adjusted downstream building block available capital,
the amount of the upstream investment is calculated as the impact,
excluding any impact on taxes, on the downstream building block
parent's building block available capital if the owner were to deduct
the investment.
U.S. Federal banking capital rules mean this part, other than this
subpart, and the regulatory capital rules promulgated by the Federal
Deposit Insurance Corporation at chapter III of this title and the
Office of the Comptroller of the Currency at chapter I of this title.
Sec. 217.603 BBA ratio and minimum requirements.
(a) In general. A supervised insurance organization must determine
its BBA ratio, subject to the minimum requirement set out in this
section and buffer set out in Sec. 217.604, for each depository
institution holding company within its enterprise by:
(1) Establishing an inventory that includes the supervised
insurance organization and every company that meets the requirements of
Sec. 217.605(b)(1);
(2) Identifying all building block parents as required under Sec.
217.605(b)(3);
(3) Determining the available capital and capital requirement for
each building block parent in accordance with its indicated capital
framework;
(4) Determining the building block available capital and building
block capital requirement for each building block, reflecting
adjustments and scaling as set out in this subpart;
(5) Rolling up building block available capital and building block
capital requirement amounts across all building blocks in the
supervised insurance organization's enterprise to determine the same
for any depository institution holding companies in the enterprise; and
(6) Determining the ratio of building block available capital to
building block capital requirement for each depository institution
holding company in the supervised insurance organization.
(b) Determination of BBA ratio. For a depository institution
holding company in a supervised insurance organization, the BBA ratio
is the ratio of the company's building block available capital to the
company's building block capital requirement, each scaled to the common
capital framework in accordance with Sec. 217.606.
(c) Minimum capital requirement. A depository institution holding
company in a supervised insurance organization must maintain a BBA
ratio of at least 250 percent.
(d) Capital adequacy. (1) Notwithstanding the minimum requirement
in this subpart, a depository institution holding company in a
supervised insurance organization must maintain capital commensurate
with the level and nature of all risks to which it is exposed. The
supervisory evaluation of the depository institution holding company's
capital adequacy is based on an individual assessment of numerous
factors, including the character and condition of the company's assets
and its existing and prospective liabilities and other corporate
responsibilities.
(2) A depository institution holding company in a supervised
insurance organization must have a process for assessing its overall
capital adequacy in relation to its risk profile and a comprehensive
strategy for maintaining an appropriate level of capital.
Sec. 217.604 Capital conservation buffer.
(a) Capital conservation buffer--(1) Composition of the capital
conservation buffer. The capital conservation buffer is composed solely
of building block available capital excluding tier 2 capital
instruments and additional tier 1 capital instruments.
(2) Definitions. For purposes of this section, the following
definitions apply:
(i) Distribution means:
(A) A reduction of tier 1 capital through the repurchase of a tier
1 capital instrument or by other means, except when a Board-regulated
institution, within the same quarter when the repurchase is announced,
fully replaces a tier 1 capital instrument it has repurchased by
issuing another capital instrument that meets the eligibility criteria
for:
(1) A common equity tier 1 capital instrument if the instrument
being repurchased was part of the Board-regulated institution's common
equity tier 1 capital; or
(2) A common equity tier 1 or additional tier 1 capital instrument
if the instrument being repurchased was part of the Board-regulated
institution's tier 1 capital;
(B) A reduction of tier 2 capital through the repurchase, or
redemption prior to maturity, of a tier 2 capital instrument or by
other means, except when a Board-regulated institution, within the same
quarter when the repurchase or redemption is announced,
[[Page 82973]]
fully replaces a tier 2 capital instrument it has repurchased by
issuing another capital instrument that meets the eligibility criteria
for a tier 1 or tier 2 capital instrument;
(C) A dividend declaration or payment on any tier 1 capital
instrument;
(D) A dividend declaration or interest payment on any tier 2
capital instrument if the Board-regulated institution has full
discretion to permanently or temporarily suspend such payments without
triggering an event of default;
(E) A discretionary dividend payment on participating insurance
policies; or
(F) Any similar transaction that the Board determines to be in
substance a distribution of capital.
(ii) Eligible retained income means, for a depository institution
holding company in a supervised insurance organization, the annual
change in the company's building block available capital, calculated as
of the last day of the current and immediately preceding calendar years
based on the supervised insurance organization's most recent form FR Q-
1, net of any distributions and accretion to building block available
capital from capital instruments issued in the current or immediately
preceding calendar year, excluding issuances corresponding with
retirement of capital instruments under paragraph (a)(2)(i)(A) of this
section.
(iii) Maximum payout amount means, for the current calendar year,
is equal to the Board-regulated institution's eligible retained income,
multiplied by its maximum payout ratio.
(iv) Maximum payout ratio means the percentage of eligible retained
income that a Board-regulated institution can pay out in the form of
distributions and discretionary bonus payments during the current
calendar year. The maximum payout ratio is determined by the Board-
regulated institution's capital conservation buffer, calculated as of
the last day of the previous calendar year, as set forth in table 1 to
this section.
(3) Calculation of capital conservation buffer. The capital
conservation buffer for a depository institution holding company in a
supervised insurance organization is the greater of its BBA ratio,
calculated as of the last day of the previous calendar year based on
the supervised insurance organization's most recent form FR Q-1, minus
the minimum capital requirement under Sec. 217.603(c), and zero.
(4) Limits on distributions and discretionary bonus payments. (i) A
top-tier depository institution holding company in a supervised
insurance organization shall not make distributions or discretionary
bonus payments or create an obligation to make such distributions or
payments during the current calendar year that, in the aggregate,
exceed its maximum payout amount.
(ii) A top-tier depository institution holding company in a
supervised insurance organization and that has a capital conservation
buffer that is greater than 150 percent is not subject to a maximum
payout amount under this section.
(iii) Except as provided in paragraph (a)(4)(iv) of this section, a
top-tier depository institution holding company in a supervised
insurance organization may not make distributions or discretionary
bonus payments during the current calendar year if the Board-regulated
institution's:
(A) Eligible retained income is negative; and
(B) Capital conservation buffer was less than 150 percent as of the
end of the previous calendar year.
(iv) Notwithstanding the limitations in paragraphs (a)(4)(i)
through (iii) of this section, the Board may permit a top-tier
depository institution holding company in a supervised insurance
organization to make a distribution or discretionary bonus payment upon
a request of the depository institution holding company, if the Board
determines that the distribution or discretionary bonus payment would
not be contrary to the purposes of this section, or to the safety and
soundness of the depository institution holding company. In making such
a determination, the Board will consider the nature and extent of the
request and the particular circumstances giving rise to the request.
(b) [Reserved]
Table 1 to Sec. 217.604--Calculation of Maximum Payout Amount
------------------------------------------------------------------------
Maximum payout ratio (as a
Capital conservation buffer percentage of eligible
retained income)
------------------------------------------------------------------------
Greater than 150 percent.................. No payout ratio limitation
applies.
Less than or equal to 150 percent, and 60 percent.
greater than 113 percent.
Less than or equal to 113 percent, 40 percent.
andgreater than 75 percent.
Less than or equal to 75 percent, and 20 percent.
greater than 38 percent.
Less than or equal to 38 percent.......... 0 percent.
------------------------------------------------------------------------
Sec. 217.605 Determination of building blocks.
(a) In general. A supervised insurance organization must identify
each building block parent and its allocation share of any downstream
building block parent, as applicable.
(b) Operation. To identify building block parents and determine
allocation shares, a supervised insurance organization must take the
following steps in the following order:
(1) Inventory of companies. A supervised insurance organization
must identify as inventory companies:
(i) All companies that are--
(A) Required to be reported on the FR Y-6;
(B) Required to be reported on the FR Y-10; or
(C) Classified as affiliates in accordance with NAIC Statement of
Statutory Accounting Principles (SSAP) No. 25 and Schedule Y;
(ii) Any company, special purpose entity, variable interest entity,
or similar entity that:
(A) Enters into one or more reinsurance or derivative transactions
with inventory companies identified pursuant to paragraph (b)(1)(i) of
this section;
(B) Is material;
(C) Is engaged in activities such that one or more inventory
companies identified pursuant to paragraph (b)(1)(i) of this section
are expected to absorb more than 50 percent of its expected losses; and
(D) Is not otherwise identified as an inventory company; and
(iii) Any other company that the Board determines must be
identified as an inventory company.
(2) Determination of indicated capital framework. (i) A supervised
insurance organization must:
(A) Determine the indicated capital framework for each inventory
company; and
(B) Identify inventory companies that are subject to a regulatory
capital framework.
[[Page 82974]]
(ii) The indicated capital framework for an inventory company is:
(A) If the inventory company is not engaged in insurance or
reinsurance underwriting, the U.S. Federal banking capital rules, in
particular:
(1) If the inventory company is not a depository institution,
subparts A through F of this part; and
(2) If the inventory company is a depository institution, the
regulatory capital framework applied to the depository institution by
the appropriate primary Federal regulator--that is, subparts A through
F of this part (Board), part 3 of this title (Office of the Comptroller
of the Currency), or part 324 of this title (Federal Deposit Insurance
Corporation), as applicable;
(B) If the inventory company is engaged in insurance or reinsurance
underwriting and subject to a regulatory capital framework that is
scalar compatible, the regulatory capital framework; and
(C) If the inventory company is engaged in insurance or reinsurance
underwriting and not subject to a regulatory capital framework that is
scalar compatible, then NAIC RBC for life and fraternal insurers,
health insurers, or property & casualty insurers based on the company's
primary source of premium revenue.
(3) Identification of building block parents. A supervised
insurance organization must identify all building block parents
according to the following procedure:
(i)(A) Identify all top-tier depository institution holding
companies in the supervised insurance organization.
(B) Any top-tier depository institution holding company is a
building block parent.
(ii)(A) Identify any inventory company that is a depository
institution holding company.
(B) An inventory company identified in paragraph (b)(3)(ii)(A) of
this section is a building block parent.
(iii) Identify all inventory companies that are capital-regulated
companies (that is, inventory companies that are subject to a
regulatory capital framework) or material financial entities.
(iv)(A) Of the inventory companies identified in paragraph
(b)(3)(iii) of this section, identify any inventory company that:
(1) Is assigned an indicated capital framework that is different
from the indicated capital framework of any next upstream inventory
company identified in paragraphs (b)(3)(i) through (iii) of this
section or does not have a next upstream inventory company; and
(i) In a simple structure, an inventory company would compare its
indicated capital framework to the indicated capital framework of its
parent company. However, if the parent company does not meet the
criteria to be identified as a building block parent, the inventory
company must compare its capital framework to the next upstream company
that is eligible to be identified as a building block parent. For
purposes of this paragraph (b)(3)(iv), a company is ``next upstream''
to a downstream company if it controls or owns, in whole or in part, a
company capital element of the downstream company either directly, or
indirectly other than through a company identified in paragraphs
(b)(3)(ii) and (iii) of this section.
(ii) [Reserved]
(2) Is assigned an indicated capital framework for which the Board
has determined a scalar or, if the company in aggregate with all other
companies subject to the same indicated capital framework are material,
a provisional scalar;
(B) Of the inventory companies identified in paragraph (b)(3)(iii)
of this section, identify any inventory company that:
(1) Is assigned an indicated capital framework that is the same as
the indicated capital framework of each next upstream inventory company
identified in paragraphs (b)(3)(i) through (iii) of this section;
(2) Is assigned an indicated capital framework for which the Board
has determined a scalar or, if the company in aggregate with all other
companies subject to the same indicated capital framework is material,
a provisional scalar; and
(3) Is owned, in whole or part, by an inventory company that is
subject to the same regulatory capital framework, and the owner:
(i) Applies a charge on the inventory company's equity value in
calculating its company capital requirement; or
(ii) Deducts all or a portion of its investment in the inventory
company in calculating its company available capital.
(C) An inventory company identified in paragraph (b)(3)(iv)(A)
through (B) of this section is a building block parent.
(v) Include any inventory company identified in paragraph
(b)(1)(ii) of this section as a building block parent.
(vi)(A) Identify any inventory company--
(1) For which more than one building block parent, as identified
pursuant to paragraphs (b)(3)(i) through (v) of this section, owns a
company capital element either directly or indirectly other than
through another such building block parent; and
(2)(i) Is consolidated under any such building block parent's
indicated capital framework; or
(ii) Owns downstreamed capital.
(B) An inventory company identified in paragraph (b)(3)(vi)(A) of
this section is a building block parent.
(4) Building blocks. (i) Except as provided in paragraph (b)(4)(ii)
of this section, a supervised insurance organization must assign an
inventory company to the building block of any building block parent
that owns a company capital element of the inventory company, or of
which the inventory company is a subsidiary, directly or indirectly
through any company other than a building block parent, unless the
inventory company is a building block parent.
(A) For purposes of this section, subsidiary includes a company
that is required to be reported on the FR Y-6, FR Y-10, or NAIC's
Schedule Y, as applicable.
(B) [Reserved]
(ii) A supervised insurance organization is not required to assign
to a building block any inventory company that is not a downstream
company or subsidiary of a top-tier depository institution holding
company.
(5) Financial statements. The supervised insurance organization
must:
(i) For any inventory company whose indicated capital framework is
NAIC RBC, prepare financial statements in accordance with SAP; and
(ii) For any building block parent whose indicated capital
framework is subparts A through F of this part:
(A) Apply the same elections and treatment of exposures as are
applied to the subsidiary depository institution;
(B) Apply subparts A through F of this part, to the members of the
building block of which the building block parent is a member, on a
consolidated basis, to the same extent as if the building block parent
were a Board-regulated institution; and
(C) Where the building block parent is not the top-tier depository
institution holding company, not deduct investments in capital of
unconsolidated financial institutions, nor exclude these investments
from the calculation of risk-weighted assets.
(6) Allocation share. A supervised insurance organization must, for
each building block parent, identify any downstream building block
parent owned directly or indirectly through any company other than a
building block parent, and determine the building block parent's
allocation share of these downstream building block
[[Page 82975]]
parents pursuant to paragraph (d) of this section.
(c) Material financial entity election. (1) A supervised insurance
organization may elect not to treat an inventory company meeting the
criteria in paragraph (c)(2) of this section as a material financial
entity. An election under this paragraph (c)(1) must be included with
the first financial statements submitted to the Board after the company
is included in the supervised insurance organization's inventory.
(2) The election in paragraph (c)(1) of this section is available
to an inventory company if:
(i) The company engages in transactions consisting solely of
either--
(A) Transactions for the purpose of transferring risk from one or
more affiliates within the supervised insurance organization to one or
more third parties; or
(B) Transactions to invest assets contributed to the company by one
or more affiliates within the supervised insurance organization, where
the company is established for purposes of limiting tax obligation or
legal liability; and
(ii) The supervised insurance organization is able to calculate the
adjustment required in Sec. 217.607(b)(4).
(d) Allocation share. (1) Except as provided in paragraph (d)(2) of
this section, a building block parent's allocation share of a
downstream building block parent is calculated as the percentage of
equity ownership of a downstream building block parent, including
associated paid-in capital, held by an upstream building block parent
directly or indirectly through a member of the upstream building block
parent's building block.
(2) The top-tier depository institution holding company's
allocation share of a building block parent that has no outstanding
common equity or that is identified under paragraph (b)(3)(v) of this
section is 100 percent. Any other building block parent's allocation
share of such building block parent is zero.
Sec. 217.606 Scaling parameters.
(a) Scaling specified by the Board--(1) Scaling between the U.S.
Federal banking capital rules and NAIC RBC--(i) Scaling capital
requirement. When calculating the building block capital requirement
for a building block parent in accordance with Sec. 217.607, where the
indicated capital framework is NAIC RBC or the U.S. Federal banking
capital rules, and where the indicated capital framework of the
appropriate downstream building block parent is NAIC RBC or the U.S.
Federal banking capital rules, the capital requirement scaling modifier
is provided by table 1 to this paragraph (a)(1)(i).
Table 1 to Paragraph (a)(1)(i)--Capital Requirement Scaling Modifiers
for NAIC RBC and the U.S. Federal Banking Capital Rules
------------------------------------------------------------------------
Upstream building block parent's
indicated capital framework:
-------------------------------------
U.S. Federal banking
NAIC RBC capital rules
------------------------------------------------------------------------
Downstream building block parent's
indicated capital framework:
U.S. Federal banking capital 0.0106 1
rules........................
NAIC RBC...................... 1 94.3
------------------------------------------------------------------------
(ii) Scaling available capital. When calculating the building block
available capital for a building block parent in accordance with Sec.
217.608, where the indicated capital framework is NAIC RBC or the U.S.
Federal banking capital rules, and where the indicated capital
framework of the appropriate downstream building block parent is NAIC
RBC or the U.S. Federal banking capital rules, the available capital
scaling modifier is provided by table 2 to this paragraph (a)(1)(ii).
Table 2 to Paragraph (a)(1)(ii)--Available Capital Scaling Modifiers for
NAIC RBC and the U.S. Federal Banking Capital Rules
------------------------------------------------------------------------
Upstream building block parent's
indicated capital framework:
---------------------------------------
U.S. Federal
NAIC RBC banking capital
rules
------------------------------------------------------------------------
Downstream building block
parent's indicated capital
framework:
U.S. Federal banking capital Recalculated 0.
rules. building block
capital
requirement *
0.063.
NAIC RBC.................... 0................. Recalculated
building block
capital
requirement *
5.9.
Capital framework:
NAIC RBC.................... 0................. Recalculated
building block
capital
requirement *
5.9.
------------------------------------------------------------------------
(2) Scaling to determine BBA ratio. For purposes of determining the
BBA ratio under Sec. 217.603(b)--
(i) A depository institution holding company for which the
indicated capital framework is the U.S. Federal banking capital rules
scales its building block available capital and building block capital
requirement the common capital framework by using the methods described
in paragraphs (a)(1) of this section. For purposes of scaling under
this paragraph (a)(2)(i), the downstream building block parent's
indicated capital framework is the U.S. Federal banking capital rules
and the upstream building block parent's indicated capital framework is
NAIC RBC; and
(ii) A depository institution holding company for which the
indicated capital framework is NAIC RBC does not scale
[[Page 82976]]
its building block available capital or building block capital
requirement.
(b) Scaling not specified by the Board but framework is scalar
compatible. Where a scaling modifier to be used in Sec. 217.607 or
Sec. 217.608 is not specified in paragraph (a) of this section, and
the building block parent's indicated capital framework (i.e.,
jurisdictional capital framework) is scalar compatible, a building
block parent determines the scaling modifier as follows:
(1) Definitions. For purposes of this section, the following
definitions apply:
(i) Jurisdictional intervention point. The jurisdictional
intervention point is the capital level, under the laws of the
jurisdiction for its domestic insurers, at which the supervisory
authority in the jurisdiction may intervene as to a company subject its
capital framework by imposing restrictions on distributions and
discretionary bonus payments by the company or, if no such intervention
may occur in a jurisdiction, then the capital level at which the
supervisory authority would first have the authority to take action
against a company based on its capital level.
(ii) Jurisdiction adjustment. The jurisdictional adjustment is the
risk adjustment set forth in table 3 to this paragraph (b)(1)(ii),
based on the country risk classification set by the Organization for
Economic Cooperation and Development (OECD) for the jurisdiction. This
adjustment is applied to the jurisdictional intervention point.
Table 3 to Paragraph ( b)(1)(ii)--Jurisdictional Adjustments by OECD
Country Risk Classification
------------------------------------------------------------------------
Jurisdictional
OECD CRC adjustment
(percent)
------------------------------------------------------------------------
0-1, including jurisdictions with no OECD country 0
risk classification.................................
2.................................................... 20
3.................................................... 50
4-6.................................................. 100
7.................................................... 150
------------------------------------------------------------------------
(2) Scaling capital requirement. When calculating the building
block capital requirement for a building block parent in accordance
with Sec. 217.607, where the indicated capital framework of the
appropriate downstream building block parent is a scalar-compatible
framework for which the Board has not specified a capital requirement
scaling modifier, the capital requirement scaling modifier is
calculated according to the following formula:
Equation 1 to Paragraph (b)(2)
[GRAPHIC] [TIFF OMITTED] TR27NO23.001
Where:
Adjustmentscaling from is equal to the jurisdictional adjustment of
the downstream building block parent;
Requirementscaling from is equal to the jurisdictional intervention
point of the downstream building block parent; and
Requirementscaling to is equal to the jurisdictional intervention
point of the upstream building block parent.
(3) Scaling available capital. When calculating the building block
available capital for a building block parent in accordance with Sec.
217.608, where the indicated capital framework of the appropriate
downstream building block parent is a scalar-compatible framework for
which the Board has not specified an available capital scaling
modifier, the available capital scaling modifier is equal to zero.
Sec. 217.607 Capital requirements under the Building Block Approach.
(a) Determination of building block capital requirement. For each
building block parent, building block capital requirement means the sum
of the items in paragraphs (a)(1) and (2) of this section:
(1) The company capital requirement of the building block parent;
that is:
(i)
[…truncated; see source link]Indexed from Federal Register on November 27, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.