Optional Federal Charter Called A 'Useful Idea' For Insurers By Fed Chair

Federal Reserve Board Chairman Ben Bernanke told House members last week it would be a "useful idea" to create a federal charter option for insurers, "particularly for large, systemically critical insurance companies."

Mr. Bernanke made his comments in response to a question from Rep. Ed Royce, R-Calif., before the House Financial Services Committee. Rep. Royce is a cosponsor of legislation recently introduced in the House of Representatives that would create a federal charter option for insurers.

In responding to Rep. Royce's question, Mr. Bernanke said the issue of an optional federal charter for insurance is a "complex one," with "a lot of issues involved."

However, he added, "in general, I believe that holding company-level supervision of large, systemically critical institutions is very important."

Mr. Bernanke also spoke out strongly on this topic the day before at a Senate Banking Committee hearing, testifying that legislation is needed giving federal regulators the ability to deal with insurers and other nonbanking institutions that get into the kind of financial trouble that can pose grave risks to the entire economy.

"We did not have effective holding company supervision in some of the cases where we have had problems," he told the Senate. "So I do believe an optional federal charter [for insurers] would be a direction worth giving serious consideration."

At the earlier Senate hearing, he said problems with American International Group demonstrated federal regulators lack the authority to take appropriate action when needed against nonbanking institutions.

"One of the big problems is that if we wanted to close down a major institution, we don't have the legal authorities and the framework to do it," he added.

"AIG had a Financial Products division which was very lightly regulated and was a source of a great deal of systemic trouble," Mr. Bernanke told Sen. Richard Shelby, R-Ala., the committee's ranking minority member, as they discussed what regulators had learned in the wake of the federal government's bailout of AIG.

"I think that we need to have broader-based coverage...[and a] more even playing field to make sure that as our system evolves, there aren't markets and products and approaches that get out of the line of vision of the regulators, and that was the problem we had in the last few years," he testified.

Mr. Bernanke said that to deal with risks posed to the entire financial system by nonbanking entities, federal regulators need legislation providing the necessary authority, noting that groups of regulators are working together on proposals to resolve this issue.

"The Congress needs, in my opinion, to set forward a much more elaborate version of the Federal Deposit Insurance Corp. Improvement Act [of 1991], if you like, that would apply to large financial institutions of various types, that would give guidance to regulators under appropriate checks and balances about under what circumstances the regulators could come in and shut down a firm in a safe way that doesn't disrupt the financial markets," Mr. Bernanke said.

He noted that "absent those kinds of powers and that kind of framework, we really are having to play it by ear," adding Congress should "think about what we need to do to ensure that the system as a whole doesn't get subjected to this kind of broad-based crisis in the future."

In the meantime, Congress is working on legislation that would deal with systemic risk. Last week, Rep. Steny Hoyer, D-Md., said the House will vote on legislation dealing with systemic risk in the financial services sector before it leaves for its Easter recess on April 3.

However, Senate action to deal with the financial crisis will likely be delayed as Sen. Chris Dodd, D-Conn., chair of the Senate Banking Committee, and Sen. Shelby have promised a more deliberate approach to reform.

The American Bankers Insurance Association "commended" the Fed chairman for his comments.

"Chairman Bernanke's testimony today highlights the urgent need to have a national discussion that recognizes the value of this much-needed reform," said ABIA Executive Director Kevin McKechnie. "This long-overdue measure would create greater efficiency and modernization for the insurance regulatory system."

Mr. McKechnie said that consensus behind an OFC has increasingly picked up steam following the failure of the current state-by-state regulatory system to act in preventing the problems at financial services giant American International Group from becoming a systemic risk to the economy.

"To suggest that the states can appropriately police insurance companies with worldwide operations, when other nations are loudly suggesting a global systemic risk regulator, is na?ve," according to Mr. McKechnie. "Clearly, solvency is a federal question."

While Mr. Bernanke testified before the House, President Barack Obama convened a meeting with the leadership of both the House and Senate Financial Services Committees to discuss an overhaul of the financial regulatory structure.

The meeting was linked to President Obama's "day of reckoning" comments in his Feb. 24 speech before Congress, in which he committed himself to prompt action to strengthen oversight of financial institutions.