We analyze the effects of a reform of capital regulation for U.S. insurance companies in 2009. The reform eliminates capital buffers against unexpected losses associated with portfolio holdings of MBS, but not for other fixed-income assets. After the reform, insurance companies are much more likely to retain downgraded MBS compared to other downgraded assets. This pattern is more pronounced for financially constrained insurers. Exploiting discontinuities in the reform’s implementation, we can identify the relevance of the capital requirements channel. We also document that the insurance industry crowds outs other investors in the new issuance of (high-yield) MBS. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.