US Representatives Push to Grant (Re)Insurers SRT Recognition in the US

Reporting: Vincent Nadeau

A bipartisan pair of senior House Financial Services Committee members, Reps. Andy Barr, R-Calif., and Jim Himes, D-Conn., have written jointly to the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., urging an update to the U.S. Basel III capital framework.

The letter has direct relevance to the significant risk transfer, or SRT, market, where insurance and reinsurance companies are increasingly active as protection providers in Europe and where U.S. recognition could unlock a significant new pool of capacity.

The June 12 letter, seen by Octus, asks regulators to formally recognize regulated insurance and reinsurance companies as “eligible guarantors” under the capital rules, on equal footing with other prudentially regulated financial companies such as commercial banks.

The letter quotes Federal Reserve Vice Chair for Supervision Michelle Bowman’s remarks in 2023, stating that capital rules should give greater recognition to transfers of risk that achieve the same economic outcome as permitted risk transfer under the rules and adding that elevating form over substance is contrary to the goal of improving risk capture.

The congressmen call the regulators’ own stated principles back into action, noting that while the international Basel Capital Accord explicitly affirms that prudentially regulated insurance companies can serve as eligible credit protection providers, U.S. regulations have lagged, leaving domestic banks, in the letter’s words, at “a competitive disadvantage to banks from jurisdictions that have implemented this provision of the Accord.”

Today, most insurers fail to qualify as eligible guarantors on two counts. The eligible guarantor definition, set out in U.S. Basel III capital rules, does not categorically recognize insurance companies at all, unlike commercial banks and other regulated financial institutions. The alternative route open to corporate entities requires the protection provider to have issued investment-grade debt securities in its own name, a bar that most insurance subsidiaries cannot clear since they typically issue no debt independently of their wider group.

The letter itself notes that the agencies’ current Basel III and Standardised Approach for Counterparty Credit Risk proposals are explicitly seeking comment on whether the eligible guarantor definition warrants revision, underscoring the timeliness of the request.