The Financial Stability Oversight Council (FSOC), chaired byTreasury Secretary Timothy Geithner, is holding off designatingAmerican International Group as a systemically important financialinstitution, perhaps into next year, according to severalsources.

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Meeting today, it was anticipated that the FSOC would designateAIG as a SIFI (systemically important financial institution),meaning it would come under the supervision of the Federal ReserveBoard and be subject to enhanced  capital equirements,liquidity requirements, short-term debt limits nad publicdisclosures, as mandated under the Dodd-Frank financial servicesreform law.

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However, National Underwriter has learned from a sourcethat AIG's designation would likely be delayed until later thismonth at the earliest.

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Such a designation was anticipated after the sale of Treasury's15.9 percent remaining stake in AIG. Such a move would have made itthe first insurance company SIFI placed under the Fed'spurview.

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Various sources cited several issues, including the fact thatthe process was complex, it had started in April, for example, anda number of steps are required under the law before such adesignation is made.

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Moreover, one source noted, the process is going to bedeliberate because court challenges are anticipated in some cases,and the staff and FSOC members want to ensure that such adesignation would be not be rejected by a court for technicalreasons.

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Moreover, amongst the sources, both within and outsidegovernment that were contacted, several noted that "this is amonumental step," and one noted that no timetable has beenestablished under the Dodd-Frank Act for such a designation by theFSOC. The timetable is not mandated under law.

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Federal Insurance Office (FIO) Director Michael McRaith muchearlier in the year suggestedthe timing of the SIFI process would be somewhat coordinatedwith the international supervisory community's own designation ofglobal systemically important insurers, or G-SIIs, for which AIG,along with many other insurers, has submitted  itsdata.

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When a traditional insurance business fails, not every car owneris going to get into a car accident immediately upondissolving,…there is not the same prospect of a run," McRaith tolda House Financial Services subcommmittee panel on Insurance,Housing and Community Opportunity chaired by Rep. Judy Biggert,R-Ill., on May 17. FIO, he said then, is working with the IAIS[International Association of Insurance Supervisors] on the"criteria, methodology and timing" of SIFI designations "so no U.S.insurer is disadvantaged through global designation of [SIFIs],"McRaith told lawmakers then.

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McRaith also noted that if "we were to go back several years,"the FSOC would find AIG systemically risky and that it wasimportant to look at a company as a whole, not just the traditionalinsurance enterprise "and look under the hood" to see if there isany systemic risk.

McRaith now chairs the group, the International Associationof Insurance Supervisors' important technical committee but theG-SIIs will be chosen ultimately in  consultation by theFinancial Stability Board (FSB), which is coordinating the overallproject to reduce the moral hazard posed by global systemicallyimportant financial institutions.

Several sources also noted that the "deliberate" and "complex"process involved also includes a mandated vote by the votingmembers members of the FSOC. Roy Woodall, the one insurance expertconfirmed by the Senate has a vote. Missouri Insurance CommissionerJohn Huff and FIO's McRaith are the other nonvoting members of theFSOC steeped in the insurance sector. The FSOC consists of 10voting members and 5 nonvoting members and brings together theexpertise of federal financial regulators, state regulators, andthe independent insurance expert appointed by the President.

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The  other nonvoting members, who serve in an advisorycapacity, are the director of the Office of Financial Research;a state banking supervisor designated by thestate banking supervisors; and a state securities commissioner(orofficer performing like functions) designated by the statesecurities commissioners.

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The state insurance commissioner, state banking supervisor, andstate securities commissioner serve two-year terms.

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At the same time, in comments Tuesday in Geneva that took placeas the Treasury Department announced it was divesting the last ofits AIG holdings, Robert Benmosche, president and CEO of AIG, saidthat large financial companies need a federal consolidatedsupervisor, but that supervision should be targeted and notblanket.

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Benmosche, said that strong, consolidated oversight, including,for example, additional capital, "should focus only on those areasthat raise concern about potential systemic risk."

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That is necessary to "avoid comprehensive and costlyrequirements that do nothing to further promote stability," hesaid.

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"Blanket increases in the amount of capital systemicallyimportant financial institutions need to hold will not necessarilymake the banking system safer or the economy stronger," Benmoscheexplained.

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"What is important is having the right capital in the rightplace; the issues AIG experienced were related to liquidity notcapital."

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"Pre-crisis, there was no single supervisor examining andregulating all aspects of AIG," he acknowledged.

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Benmosche made his comments at the Geneva Association'sInsurance and Finance Seminar at Lloyd's in London this week.

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Similar comments were made in a letter to the Federal ReserveBoard signed by 33 members of the House Financial ServicesCommittee, both Democrats and Republicans, regarding consolidatedregulation of insurers which operate savings and loans.

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The Fed has come under fire for proposing regulations that wouldprovide consolidated regulation of these institutions through useof Generally Accepted Accounting Principles instead of theStatutory Accounting Principles used by state regulators inoverseeing operating subsidiaries of insurance holdingcompanies.

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"… for insurance companies not currently required to preparefinancial statements using GAAP, a new mandate requiring additionalstatements using GAAP would be costly with no improvement inunderstanding the financial health of the insurance company," theletter said.

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"The final rules should reflect and consider the uniqueinsurance business model without undermining prudentialsupervision," the letter from the House FSC members said.

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The letter asked that the Federal Reserve, including theregional banks, consult with the National Association of InsuranceCommissioners "to design appropriate capital requirementsspecifically for insurance that complement existing stateregulatory requirements," the letter said.

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Also, the letter asked the Fed to forward to the committee a"written description of your development of capital standards forinsurance companies thus far, including a description of the Fed'sengagement with the NAIC and regional Fed banks."

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In his comments at Geneva, Benmosche made the same point.

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He highlighted the "robustness" of the existing regulatoryframework employed by state and local insurance regulators, sayingthis was confirmed "by how traditional insurers fared through thecrisis."

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He also proposed that a global supervisory system specific tothe holding company/insurance subsidiary model "should build on theproven success of that framework."

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Correction: It was reportedearlier that the Treasury Department would hold off designating AIGas a systemically important financial institution until afterbudget negotiations were completed.