On June 23, the FDIC, FRB and OCC released proposed revisions to the risk-weighted assets portion of Schedule RC-R, Regulatory Capital, in the Consolidated Reports of Condition and Income (Call Report). The revised schedule incorporates the standardized approach for calculating risk-weighted assets under Basel III.
The draft form and instructions do not appear to provide specific instructions for BOLI assets or investment fund exposures in general. The instruction for line 2b (“Available-for-sale securities”) includes the following note in a section describing the 300% risk-weight applicable to publicly traded equity securities:
Certain investments in mutual funds reported in Schedule RC-B, item 7, may be risk-weighted using the simple risk-weight and look-through approaches as described in §§.51 to .53 of the regulatory capital rules.
However, line 2b of the draft form requires the assets to be allocated across discrete risk-weight categories (e.g., 0%, 20%, 50%, 100%, 300%, etc.). There does not appear to be a field that would allow for an aggregate effective risk-weight for a mutual fund.
Similarly, each of the other balance sheet categories identified on the form require segmentation by risk-weight categories (with the exception of securitizations, which are segmented by computational approach). As such, it appears that banks will need to segment the BOLI exposure into underlying risk-weight categories.
While the primary categories for which BOLI is likely to be classified are lines 8 (“All other assets”) and 9d (“All other on-balance sheet securitization exposures”), we have identified a couple of aspects of the proposed rules requiring additional clarification, especially in the context of the full look through approach. Please contact us if you would like further information regarding these questions.
Comments must be submitted by August 22.
On June 12, the FRB released a proposed rule to modify the timing of the annual CCAR stress testing cycles. Beginning January 1, 2016, the timing would shift by one quarter (i.e., instead of a 9/30 as-of date with regulatory scenarios provided by 11/15; the as-of date would be 12/31 and scenarios would be provided no later than 2/15). The submission and disclosure timelines would be similarly pushed back under the proposed rule. The FRB notes that the existing timing creates resource constraints for institutions that also face significant year-end reporting obligations.
Under the proposal, this year’s stress test cycle would not be adjusted. A number of other changes are being proposed as well. Comments must be submitted by August 11.
The OCC and FDIC released related proposals to adjust the timing of the Dodd-Frank Stress Test requirements.
On June 22 (print version June 23), the New York Times published an article titled “An Employee Dies, and the Company Collects the Insurance.” The author, David Gelles, became interested in COLI as a result of a Los Angeles Times editorial reporting on a rival newspaper’s contemplated COLI purchase. (We covered the L.A. Times editorial in our February 2014 LRA.)
While researching the topic Mr. Gelles interviewed a number of people within the BOLI industry, including a member of our firm. One common misconception we attempted to dispel is the notion that policy owners are motivated to purchase COLI/BOLI to profit from the deaths of insured employees. To that end we provided Mr. Gelles some statistical proofs that, overall, the mortality risk component of COLI/BOLI is a consistent source of profit for insurance companies that underwrite them, not the banks that purchase them (e.g., comparing the aggregate incremental yield from death benefits to the gross COI charges). Unfortunately, the New York Times article, like each preceding mainstream article, shuns available facts in favor of more salacious sound bites.
Not surprisingly, a number of rehashed articles, blogs and editorials have surfaced as a result of the New York Times article. Links include: NYT Blog, Fox Business, Fortune, Bloomberg, Motley Fool, and Center for Research on Globalization.