WHY DO BANKS OWN SO MUCH CASH VALUE LIFE INSURANCE?
Banks are required by regulators to keep large amounts of cash on hand to meet unexpected obligations. This cash cushion must be unassailable. Banks must be able to access this cash immediately. They cannot put this money at risk.
Regulators call this TIER ONE CAPITAL. By law, banks must keep four percent of assets in Tier One Capital. Using cash value life insurance was so attractive, the Federal Reserve had to make a rule to limit how much cash value life insurance banks could buy.
Even the longest maturity bonds fail to meet the ultra-long duration characteristics and holding a dedicated portfolio of bonds to maturity poses other risks that properly structured BOLI can mitigate.
Bank Owned Life Insurance (BOLI) has two additional attributes that can make it an effective vehicle for financing general welfare costs
When coupling the favorable accounting with tax deferred growth, BOLI is immediately accretive to earnings and can make for an attractive, long-term balance sheet asset.
Currently banks are only allowed to keep a maximum of 25 percent of their Tier One Capital in cash value life insurance. Banks buy ALL they are allowed to buy.