In contrast to the FRB’s advance notice of proposed rulemaking on insurance capital standards, this proposal applies only to those insurance companies designated by the FSOC as systemically-important financial institutions (SIFIs). Both actions were likely spurred by a key provision in the court decision revoking MetLife’s SIFI designation, with the court finding that FSOC could not properly evaluate systemic risk because it did not know what rules would apply upon designation. As other courts might well have reached similar findings should the two remaining designees seek de-designation or FSOC try to name additional insurance SIFIs, the Board – a major supporter of the Dodd-Frank framework – has hastened to lay out the regulatory structure. This includes not only the SIFI capital standards included in the ANPR, but extensive risk-management and liquidity requirements. Although the risk-management ones may be relatively easy for SIFIs to implement and enhance enterprise-wide risk management in ways many will accept, the liquidity proposals pose significant operational, governance, and funding challenges. The most significant of these pertain to the specific requirements of the proposed liquidity-stress test and the mandatory liquidity buffer comprised only of assets that meet FRB-specified conditions. Restrictions also on where assets may be held and how inter-company transfers are handled are also likely to disrupt current liquidity risk-management practices, with the total body of the new approach requiring larger holdings of eligible, highly-liquid assets readily available to the top-tier parent at greater cost to the SIFI, resulting in still more stringent regulatory-capital requirements.
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