NU Online News Service, March 26, 12:20 p.m.EDT

WASHINGTON–The Obama administration today askedCongress for authority to create a federal regulator with authorityto administer large insurance companies.

Under the proposed scheme, federal administration would be basedon "the financial system's interdependence with the firm, thefirm's size, leverage (including off-balance sheet exposures), anddegree of reliance on short-term funding."

Another characteristic will be the importance of the firm "as asource of credit for households, businesses, and governments, andas a source of liquidity for the financial system."

In testimony before the House Financial Services Committee,Treasury Secretary Tim Geithner said what he is asking Congresstoday is only the first step. Mr. Geithner's comments also includedis remark that,"I think there is a good case for introducing anoptional federal charter for insurance companies."

The comprehensive framework for regulatory reform will coverfour broad areas: systemic risk, consumer and investor protection,eliminating gaps in our regulatory structure, and internationalcoordination.

"In the coming weeks, I will present detailed frameworks foreach of these areas," he added.

Secretary Geithner outlined the administration's plans intestimony before the House Financial Services Committee.

"Let me be clear: the days when a major insurance company couldbet the house on credit default swaps with no one watching and nocredible backing to protect the company or taxpayers from lossesmust end," said Mr. Geithner.

"We must cover financial institutions that have the potential topose systemic risks to our economy but that are not currentlysubject to the resolution authority of the FDIC," he added.

"This would include bank and thrift holding companies andholding companies that control broker-dealers, insurance companies,and futures commission merchants, or any other financial firmposing substantial risk to our economy," he said.

He said that proposed legislation will be submitted to providesuch a U.S. regulator with authority to put such firms intoconservatorship or receivership and,, "The regulator of theseentities will also need a prompt, corrective action regime thatwould allow the regulator to force protective actions as regulatorycapital levels decline, similar to that of the FDIC with respect toits covered agencies."

The institutions that would be covered under such authority willbe "financial institutions that have the potential to pose systemicrisks to our economy but that are not currently subject to theresolution authority of the Federal Deposit InsuranceCorporation."

"This would include bank and thrift holding companies andholding companies that control broker-dealers, insurance companies,and futures commission merchants, or any other financial firmposing substantial risk to our economy," he said.

In a research report, the Concept Capital, a New York-basedinvestment management and research firm, said the proposal bySecretary Geithner aims to "give a systemic risk regulatorunprecedented power over financial firms of all types."

That means, the report said, "federal regulators will have thepower to examine the books, capital position and leverage atinsurance companies, hedge funds, private equity firms, and anyother financial firm.

"The idea is to focus only on those financial firms that couldpose a systemic risk to the financial system," the report said.

The report noted that Secretary Geithner is not identifyingwhich agency would be the systemic risk regulator, though HouseFinancial Services Chairman Barney Frank, D-Mass., wants to givethe job to the Federal Reserve.

New York Insurance Superintendent Eric Dinallo, reacting to Mr.Geithner's testimony, said what is being sought is "some kind ofoversight and resolution of the holding companies and lightlyregulated parts of these conglomerates, like we saw at AmericanInternational Group." He called it a serious plan.

Mr. Dinallo added, however, that, "I believe that insurancecompanies standing alone, even very large ones, don't present thesame systemic risk as the financial supermarkets or large,leveraged institutions. I think we have to parse this out a bit. Itwasn't the insurance companies that caused this problem atAIG."

The National Association of Insurance Commissioner issued astatement saying they were "encouraged" by Mr. Geithner's remarks"that this proposal will maintain the important role that stateregulators play in supervising insurance companies. We agree withhis assetion that financial institutions must not be allowed to'cherry pick' among competing regulators in search of the loweststandards and constraints."

NAIC said it agrees there is a need to address how resolutionswould operate for financial structures and activities outside theexisting FDIC system for banks and state guaranty fund system forinsurers, adding that "any expansion of federal resolutionauthority should not displace those proven systems."