The American Bankers Association (ABA) has written a letter to the Federal Housing Finance Agency (FHFA) requesting for them to overturn its decision on banning captive insurance companies from its membership.
In January 2016, FHFA banned captive insurance companies from being members of the Federal Home Loan Bank (FHLB) system and at the time, they received widespread hostility to the move.
The ban came as a result of an increase of real estate investment trusts (REIT) setting up captive subsidiaries as a means to access the system.
Joseph Pigg, senior vice president and senior counsel at ABA, noted in his letter to the FHFA that it shares FHFA’s concerns about the use of captive insurance companies as conduits for otherwise ineligible members to gain entry to the system.
“However, we took issue with FHFA’s approach, raising concerns that deeming captive insurers as ineligible for membership ran counter to the clear meaning of the statute,” he added.
Pigg outlined: “As FHFA appropriately notes, the categories of eligible system members are established in the statute by Congress. FHFA should not, unless clearly and specifically directed by Congressional statute, authorise expanded membership to other entities that are not already authorised by statute.”
He stated that the FHFA should revisit their decision of denying all captive insurance companies and the FHFA “should be guided by Congressional intent to allow these insurance companies membership in the system, but FHFA should limit each captive insurer’s ability to access the system based upon its potential to impact the safety and soundness of the system”.
According to the ABA, the FHFA should factor differences in prudential regulation and supervision into its regulation of member access to the system and adjust eligible members’ system access as needed to protect all members’ capital investment.
As an example, he explained that member access standards should differ for a captive insurer owned by a federally regulated and supervised depository institution versus a captive insurer owned by an entity not subject to prudential regulation and capital standards sufficient to protect against the potential losses that member could present to the system and its members.
He noted in this example “it is conceivable that a captive insurer, owned by a parent without sufficient regulation or capital, could be technically eligible for membership in the system but effectively unable to borrow, due to the risks such borrowing might present”.
In addition, Pigg also recommended that FHFA establish clear, consistent, and risk-based member access standards that account for differences in prudential regulation such as for less stringently regulated credit unions and non-depository CDFI’s.
