She wrote an amendment that was incorporated into the Dodd-Frank financial reform act as Section 171 regarding capital requirements for financial institutions, designed to guard against the "too big to fail" situation that required government bailouts in the financial crisis.
In formulating the requirement, however, she had no intention of subjecting insurance companies to exactly the same capital standards as banks, since they have a different business model and their insurance activities are regulated at the state level.
She has since written letters to officials at the Federal Reserve, which is responsible for these new regulations, further clarifying the relevant section in Dodd-Frank. The Fed, however, remains unconvinced that according to the letter of the law they have much discretion in allowing different standards for insurers than for banks.
"As I have already said," Collins said at a Senate hearing last week, sitting on the other side of the dais testifying as a witness, "I do not agree that the Fed lacks this authority and find its disregard of my clear intent as the author of Section 171 to be frustrating, to say the least."
While maintaining that the law is already clear enough, Collins has proposed new legislation, which enjoys broad bipartisan support, specifying that insurers should not be subject to the same capital requirements as banks.
The imbroglio highlights a gray area in legislation — the concept of "legislative intent." Despite their best efforts, lawmakers will sometimes use language that is ambiguous, requiring interpretation. Courts, the ultimate arbiter in these cases, will themselves cite legislative intent in tilting an interpretation one way or the other.
Not, however, the Federal Reserve. Janet Yellen, in her debut as Fed chair last month before a Senate panel, maintained that the very amendment authored by Collins limits the! Fed's ability to set different capital standards for insurance companies.
"The Collins Amendment does restrict what is possible for the Federal Reserve in designing an appropriate set of rules," she said. "So it does pose some constraints on what we can do, and we will do our very best to craft an appropriate set of rules subject to that constraint."
If one didn't know better, that statement might be viewed as mildly passive-aggressive, since the Fed is taking its time not only on capital requirements but on numerous rules mandated under the complex Dodd-Frank legislation.
Of course it is not. It does reflect, however, a caution, not to say timidity, on the part of regulators in reacting to the financial crisis. Nearly four years after Dodd-Frank's enactment, regulators have finalized only about half of the new rules it calls for.
In the case of insurance companies, legislators are keen to avoid a repetition of the bailout of American International Group, an insurer that threatened to founder because it was overextended in derivatives contracts.
But they are cognizant that most insurers, which are regulated primarily by the states, do not engage in this kind of activity and do not pose that kind of risk.
The fear is capital standards calibrated primarily to the financial structure and risks of big banks will be overly burdensome for big insurers because of differences in the business model.
At last week's hearing before the Senate Banking subcommittee, it was not only Collins' fellow Republicans, like Pat Toomey of Pennsylvania and Mike Johanns of Nebraska, who spoke out in support of her plea for less restrictive capital requirements for insurers, but also the subcommittee chairman, Sherrod Brown, a liberal Democrat from Ohio.
Brown underscored the differences between insurers and banks. Their funding sources are different, he said, their investment timeline is different, and their risks are different. The feeling on Capitol Hill, it seems, is that the F! ed could ! resolve this issue if it put its mind to it.
"There is nearly universal agreement (among lawmakers) that this should not require legislation," Brown said at the hearing. The existing law, he said, "gives regulators the flexibility to treat insurance differently."
Collins, herself a former state insurance regulator, acknowledged that it is a complex and technical subject. She emphasized that nothing should be done that would weaken the intent of Dodd-Frank as a whole to ensure stable financial institutions.
But she and her Senate colleagues made it clear what their intent was and is regarding regulation of insurance companies, and pledged new legislation if necessary to bend regulators to their will.
The insurance brouhaha is a prime instance of the friction between legislators, who feel the pressure of a political backlash against financial institutions, and regulators, who have yet to demonstrate that they are fully on board with the financial reforms. It is a test case whether regulators are willing to follow the spirit of the law as well as the letter.
Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.
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