Most Americans probably aren’t familiar with the Basel III Endgame and its proposed changes to U.S. banking capital requirements. To spread awareness of the issue, Basel III detractors are running TV commercials criticizing its potential impact on banks.
What the ads don’t say is that the proposal will also affect life insurers and their customers.
Basel III will require banks to hold onto more capital or assets when they own “exposures” or debt securities with non-publicly traded life insurers.
Federal banking regulators justify the difference in the risk-weighting percentage by saying public companies “typically are subject to mandatory regulatory and public reporting and disclosure requirements.”
Actually, all life insurers, publicly and non-publicly traded, are subject to mandatory regulatory and public disclosures, and face insurance regulations that are designed to promote hedging and risk management. U.S. state insurance regulators closely monitor life insurance companies’ operations to ensure their safety and soundness so that every consumer of life insurance products is protected.
A consistent rating no higher than 65% for all investment grade life insurers would more appropriately reflect their “creditworthiness.”
The risk weighting changes would also have a downstream impact on the Bank-Owned Life Insurance (BOLI) market, which helps life insurers work with banks to fund and enhance essential employee benefit programs including health care, group life and retirement plans.
By requiring banks to hold more capital for owning life insurance policies from non-publicly traded insurers vs. public insurers, the BOLI market would be severely impacted. This would threaten the ability of banks to provide vital benefits to their employees.
Other more complex measures of the Basel III proposal require life insurers to tie up more capital to participate in derivatives markets. These changes would negatively impact life insurers’ use of derivatives to mitigate risk and could result in less innovative consumer-facing products.
Several Federal Reserve Governors have criticized Basel III after Federal Reserve Vice Chair for Supervision Michael Barr spearheaded its release. Federal Reserve Chair Jerome Powell has hinted that the Fed is considering a re-proposal or will make significant changes to the final U.S. rules expected this August.
Federal banking regulators should go back to the basics on Basel III to understand its impact on highly regulated, well capitalized market participants like life insurers. The ‘endgame’ should result in banking capital requirements that make sense and don’t harm life insurers and their customers.
Madison Ward is Counsel at the American Council of Life Insurers (ACLI). Madison primarily assists with regulatory matters associated with registered securities and professionals as well as members’ prudent risk hedging practices using derivatives products. Prior to joining ACLI, Madison was Government Affairs Manager and Policy Counsel at the North American Securities Administrators Association and previously worked at the Kansas Insurance Department.
