Monthly LRA Update

REGULATORY DEVELOPMENTS

FRB Vice Chair for Supervision – Remarks on Status of Basel III Endgame On September 10 the FRB Vice Chair for Supervision, Michael S. Barr, delivered a speech at the Brookings Institution. His comments focused on Basel III Endgame and capital surcharges for G-SIBs.

Noteworthy statements include

● He will recommend a re-proposal of Basel III Endgame and G-SIB surcharge rules

● Banks with assets between $100 and $250 billion would no longer be subject to the endgame changes, other than the requirement to recognize unrealized gains and losses of their securities in regulatory capital

● The re-proposals would increase aggregate common equity tier 1 capital requirements for the G-SIBs by 9%

● Non-G-SIBs would have estimated impact of 3%-4% increase in capital requirements (largely due to inclusion of unrealized gains/losses in regulatory capital)

● He proposes to extend the reduced risk weight for low-risk corporate exposures to certain regulated entities that a bank judges to be investment grade and that are not publicly traded

More broadly, there had been speculation that the agencies might release updated proposals in September; however, further reports indicated that the FDIC board was reportedly at an impasse over the revised proposals – potentially delaying any resolution until after the election.

TAX DEVELOPMENTS

IRS Releases Proposed Corporate AMT Rules On September 12 the IRS and Treasury released proposed regulations that would address the application of the corporate alternative minimum tax (CAMT) which is imposed on the adjusted financial statement income (AFSI) of certain corporations for taxable years beginning after 2022.

The 600+ page proposal includes numerous adjustments to financial statement income for purposes of calculating the tentative minimum tax. Upon initial review, we did not observe anything in the proposals that relate to BOLI/COLI. As such, we continue to believe that GAAP earnings arising from BOLI/COLI would continue to be fully included in the AFSI and be subjected to tentative minimum tax for an applicable corporation.

As a reminder, the CAMT imposes a 15% minimum tax on AFSI on corporations with over $1 billion of AFSI for three consecutive years.

The proposed rule sets forth AFSI adjustments for certain insurance companies, including one for “covered variable contracts” [see §1.56A-22(c)]. This provision appears to ensure that the AFSI adjustments for an insurance company are consistent with the premise that the Separate Account assets directly offset an insurer’s liabilities under a variable contract.

We did not observe any rules specific to banks.

There are various rules related to corporate reorganizations, mergers and acquisitions. We have not yet reviewed these aspects in detail.

OTHER DEVELOPMENTS

FRB of Chicago Report on State Insurance Guaranty Funds In the May 2024 issue of Economic Perspectives, Daniel Hartley (Senior Economist and Economic Advisor in the research department of the Federal Reserve Bank of Chicago) published a report on how state insurance guaranty associations operate.

The report describes the design and legal processes that apply if an insurer becomes financially troubled and how state guaranty associations provide protections to policyholders. The author notes some risks and structural considerations, including unknown coverage amounts and uncertainties that arise through an often time-consuming insolvency process. The report describes what happened with two of the largest insurer insolvencies to date: Penn Treaty (who issued long-term care insurance) and Executive Life.

The report is educational in nature and doesn’t specifically call for any public policy action or response. However, it does call into question how effective the regime would be if a large life insurer were to become insolvent.