Members of the Senate Banking Committee and a property andcasualty trade group took issue Wednesday with new internationalcapital standards that U.S. regulators are considering forregulating systemically significant insurance companies as well asinsurers that operate savings and loans.

Sen. Tim Johnson, D-S.D., speaking at a hearing, voiced concernabout the rules regulators will use to implement internationalcapital drafted by the Basel Committee on Banking Supervision.Other senators on the committee echoed Johnson's concerns.

The June proposal to implement the so-called "Basel III"standard would require banks and systemically significant non-bankssuch as insurance companies to maintain "loss-absorbing capital" ofat least 7 percent of risk-weighted assets.

They also establish new risk weightings for residentialmortgages, commercial real estate, sovereign debt andsecuritizations that require more capital for riskier assets.

The regulators involved are the Federal Reserve, the FederalDeposit Insurance Corporation and the Comptroller of theCurrency.

They have already agreed to delay the proposed Jan. 1, 2013implementation date indefinitely to provide transition rules and,in the case of insurance companies, to make the rules less"bank-centric" and more applicable to the different model ofinsurance companies.

But Johnson said, "Before moving forward with applying theserules to insurance companies, the banking agencies should takeadditional time to work with state-insurance regulators, theFederal Insurance Office, and the independent insurance expert onthe Financial Stability Oversight Council to better understand theinsurance-accounting framework and risk-based capital modelcurrently used.

"This feedback should then be used to develop a capitalframework that is more suitable for financial institutions engagedin the traditional business of insurance, and give these companiesappropriate time to implement the new framework."

In a statement released after the hearing, the Property andCasualty Insurers Association supported Johnson, saying theso-called Basel III capital standards should be scrapped.

PCI says international standard-setting bodies should focus noton more regulation "but instead identify the perceived gaps thatwere exposed during the financial crisis and then develop the mosteffective and efficient approach to bridging those gaps."

PCI "urged the Senate Banking Committee to minimize thepotentially harmful impacts of Basel III on main street businessesand the economy."

The statement says that while PCI "applauds"the agencies for delaying implementation, there are manyoutstanding issues to be considered that impact the financialservices industry and the larger economy."

PCI adds that it appreciates "the careful consideration given tothe depository institution holding companies with significantinsurance activities."

But the statement adds, "These developments, with regard tobanking regulation, also underscore the importance of extremecaution in further regulating the insurance sector, which has avery different business model and regulatory structure frombanking."

A key banking regulator defended the proposals, while alsoacknowledging that federal officials are revisiting them.

Michael Gibson, director of bank supervision and regulation forthe Fed, said in testimony that the proposed rules are consistentwith the law the regulators are required to implement, as well asconsistent with the rules other financial institutions whichoperate thrifts operate under.

He said the proposed rules are consistent with the Fed's"long-standing practice of applying consolidated minimum-capitalrequirements to bank-holding companies, including those thatcontrol functionally regulated subsidiary insurance companies.

"Importantly, such an approach eliminates incentives to engagein capital arbitrage by booking individual exposures in the legalentity in which they receive the most favorable capital treatment,"Gibson contended.

Gibson added, "The Fed takes these comments seriously and willconsider them carefully in determining how to appropriately applyregulatory capital requirements to depository institution holdingcompanies with significant insurance activities."