December 2014

LEGISLATIVE DEVELOPMENTS

Insurance Capital Standards Clarification Act

On December 18, the Insurance Capital Standards Clarification Act was signed into law by the President. The Act, sponsored by Senator Collins (R-ME), amends the Dodd-Frank Act concerning establishment of minimum leverage and minimum risk-based capital requirements on a consolidated basis for a depository institution holding company or a nonbank financial company supervised by the Federal Reserve. In particular, this law provides the Federal Reserve with the flexibility to apply different capital requirements to insurance companies than those that apply to banking entities.

REGULATORY DEVELOPMENTS

FRB Extends Volcker Rule Conformance Period

On December 18, the FRB announced that it would give banking entities until July 21, 2016, to conform investments in and relationships with covered funds under the Volcker Rule. The press release also noted that the FRB intends to issue a similar one-year extension next year (i.e., bringing the actual conformance date to July 21, 2017).

The FRB noted that providing banking entities with additional time to conform investments that were made in covered funds prior to the adoption of the regulatory rules implementing the Volcker Rule will allow banking entities to terminate and/or divest investments in an orderly manner which is consistent with safe and sound banking.

FDIC Issues Guidance for the Resolution Plans of Large Banks

On December 17, the FDIC issued guidance for resolution plans that insured depository institutions with assets greater than $50 billion must submit periodically to the FDIC. Under the guidance, a covered institution must provide a fully developed discussion and analysis of a range of realistic resolution strategies. Each institution should include in its discussion and analysis at least one strategy that primarily involves the separation and sale of the covered institution’s deposit franchise, core business lines, and/or major assets to multiple acquirers. It should also include a second strategy that involves the liquidation of the firm, including a payout of insured deposits.

To assist institutions in writing their plans, the guidance includes direction regarding the elements that should be discussed in a fully developed resolution strategy and the cost analysis, clarification regarding assumptions made in the plan, and a list of significant obstacles to an orderly and least-costly resolution that institutions should address.

Currently, 36 insured banks meet the rule’s criteria.

TAX DEVELOPMENTS

JCT Description of Certain Revenue Provisions Contained in President’s Fiscal Year 2015 Budget Proposal

On December 17, the Joint Committee on Taxation released a report describing certain provisions of the President’s Fiscal Year 2015 Budget Proposal (which was submitted to Congress on March 4, 2014). The introduction notes that many of the provisions in the 2015 budget proposal were substantially similar to those in prior years. Therefore, in this document, the JCT only described new or materially modified provisions. For recurring provisions, the report references a historical document for the description.

The document included an explanation of the proposal to Require that Derivative Contracts Be Marked to Market with Resulting Gain or Loss Treated as Ordinary as well as the following (excerpted) explanation of the proposal to Modify Rules that Apply to Sales of Life Insurance Contracts:

Modify Rules that Apply to Sales of Life Insurance Contracts

The fiscal year 2015 budget proposal modifies the prior year budget proposal by adding a reporting requirement upon the payment of benefits under the acquired policy.³¹⁸ Upon the payment of policy benefits to the acquirer, the modified proposal requires the insurance company to report the gross amount of the benefit payment, the acquirer’s taxpayer identification number (“TIN”), and the insurance company’s estimate of the buyer’s basis to the IRS and to the payee.

The fiscal year 2015 budget proposal further modifies the prior year budget proposal by eliminating certain exceptions to the present-law transfer for value rule and substituting an exception in the case of a transfer of a policy to the insured, or to a partnership or a corporation of which the insured is a 20-percent owner. The exceptions eliminated are those present-law exceptions that apply if the transfer is to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer. Other present-law exceptions (if the transferred policy has a carryover basis in whole or part, or if the transfer is to the insured) are retained under the proposal.

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³¹⁸ The prior year budget proposal is described in Joint Committee on Taxation, Description of Revenue Provisions Contained in the President’s Fiscal Year 2013 Budget Proposal (JCX-2-12), June 2012, pp. 459-463. The estimated budgetary effect of this proposal can be found at Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the President’s Fiscal Year 2015 Budget Proposal (JCX-36-14), Item VI. B., reprinted in the back of this volume.

We confirmed that the projected financial impact of the life insurance reforms were unchanged from the JCT analysis released in April 2014.

OTHER DEVELOPMENTS

FDIC Interest Rate Risk Management Insights

On December 16, the FDIC published its Winter 2014 version of Supervisory Insights. This version largely focuses on managing interest rate risk (IRR), including effective governance processes, development of key assumptions for analyzing IRR, developing an in-house independent review of IRR management systems, and supervisory expectations during an FDIC examination.

FSOC Designates MetLife as a SIFI

On December 18, FSOC made a final determination that material financial distress at MetLife could pose a threat to the financial stability of the US and that MetLife should be supervised by the FRB and be subject to enhanced prudential standards. MetLife had challenged the initial designation reached on September 4, 2014.

In response to the designation, MetLife issued a statement expressing disappointment with FSOC’s decision, explaining that it believes “MetLife is not systemically important under the Dodd-Frank Act’s criteria, and the company has presented substantial and compelling evidence to FSOC to support this conclusion.”

MetLife also noted that, pursuant to Dodd-Frank, MetLife now has 30 days to seek a judicial review of FSOC’s decision and that the company will closely consider this course of action.

Among others, Prudential and AIG have already been identified as SIFIs under this rule.

Basel Revisions to the Securitization Framework

On December 11, the Basel Committee released final revisions to the securitization framework (the “Basel III Securitization Framework”). The revised framework will become effective in January 2018. Some primary objectives with respect to the revisions include:

• Reduced reliance on external ratings;
• Incorporation of additional “risk drivers” within each underlying approach (e.g., tranche thickness and tranche maturity); and
• A recalibration of underlying risk weights.

The Basel III Securitization Framework continues to provide an external ratings-based approach (ERBA); however, it is not at the top of the hierarchy of approaches. In instances where the ERBA is used, the risk-weight look-up table has been expanded and, as noted above, the risk weights will also be impacted by maturity and tranche thickness. Below is a table of the ERBA risk weights for securitizations with long-term ratings.

As a reminder, US law does not allow banking regulators to use external ratings in capital regulations.

Basel Proposed Revisions to Standardized Approach for Credit Risk

On December 22, the Basel Committee released a consultative paper outlining proposed revisions to the Standardized Approach for credit risk. Some primary objectives of the proposed revisions include:

• Reduced reliance on external credit ratings;
• Enhanced granularity and risk sensitivity;
• Updated risk-weight calibrations; and
• More comparability with the internal ratings-based approach with respect to the definition and treatment of similar exposures.

The Committee is considering replacing references to external ratings, as used in the current standardized approach, with a limited number of risk drivers. These alternative risk drivers vary based on the particular type of exposure and have been selected on the basis that they are simple, intuitive, readily available, and capable of explaining risk across jurisdictions. Below is a table identifying a few of the changes being considered.

Comments on the proposals are due by March 27, 2015. Any change to the US risk-based capital rules as a result of proposals in this or subsequent papers released by the Basel Committee would be considered in a manner consistent with the US notice and comment process.

DMF Certification Process

On December 18, the National Technical Information Service (NTIS) announced that the Limited Access Death Master File Subscriber Certification Form has been reinstated and is available for download. Entities that were already certified for access do not need to re-certify.

On December 19, the NTIS announced that it was publishing a Notice of Proposed Rulemaking (NPR) describing a rule that would, if implemented, establish, pursuant to Section 203 of the Bipartisan Budget Act of 2013 (Pub. L. 113-67), a certification program to replace the temporary certification program currently in place for access to the DMF.

Comments are due by January 29, 2015.