OFC Boosters & Busters Make Points To Congress

WASHINGTON–Supporters and opponents of a federal role for insurers used their appearances at a congressional hearing on American International Group's bonus payments to reiterate their views today on a proposed optional federal insurance charter.

In brief comments at the hearing, Rep. Ed Royce, R-Calif., a longtime supporter of legislation that would create an OFC, said he has been warning of the "system risk" problems created by state regulatory system for insurance since 2006, and that they would continue to exist until a federal role for insurance is created.

For the National Association of Insurance Commissioners, Joel Ario, Pennsylvania insurance commissioner, restated the state regulators' view that creating separate federal charters would create concerns about "regulatory arbitrage," i.e., the ability to choose either state or federal regulation.

Elsewhere, both President Obama and Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, raised the OFC issue.

The president, in comments aboard Air Force One this afternoon before he left for California, said that he and members of his White House Economic Council have begun discussions with leading congressional players, including Rep. Frank, on the possibility of legislation that would create a new regulatory entity along the lines of the Federal Deposit Insurance Corporation to give the government more authority over some financial institutions, such as AIG.

And in a hearing on systemic risk yesterday, Rep. Frank asked Tim Ryan Jr., president and chief executive officer of the Securities Industry and Financial Markets Association, what Congress should do if a company decides not to opt for the optional federal charter–since the issue of an OFC "will continue to be a major topic for this committee."

Mr. Ryan replied that if a company did not opt for a federal charter but it was important to the financial services system or involved in systemically important activities, "then a federal regulator would step in."

But, in his comments today, Commissioner Ario argued, "Some have rather disingenuously tried to use AIG's problems as an argument for an optional federal charter for insurance companies."

He testified, "There are some lessons to be learned from the AIG situation, but shifting the primary locus of insurance regulation to the federal level is the wrong lesson to learn from AIG for two reasons."

He explained that when you permit companies to pick their regulator, "you create the opportunity for regulatory arbitrage."

And, he added, "when you allow regulatory arbitrage, you increase risk, because you create the opportunity for a financial institution to select its regulator based on who might be more lenient, who might have less strict rules, who might demand less capital."

Second, he said, "what happened at AIG demonstrates the strength and efficacy of state insurance regulation."

Indeed, Mr. Ario said, "the federal rescue of AIG would have been an even tougher call were it not for the well-capitalized insurance companies that provide the possibility that the federal government and taxpayers will be paid back.

"AIG's insurance companies remain strong, in part because state regulation continues to wall them off from the high risk activities engaged in by AIG Financial Products," he said.

But, in his comments at the hearing, Rep. Royce disagreed.

"Central to this discussion on AIG is what Chairman Bernanke told us," Rep. Royce said in his opening statement. "He said the 54 various state insurance regulators didn't have the capacity to deal with a global insurance company."

He then added, "I have been warning about this systemic gap since 2006.

"Rep. Melissa Bean, D-Ill., and I have been pushing a bill that will close that gap, and until we establish a world-class regulatory alternative that is able to deal with a global insurance company like this, that gap will remain."

In the meantime, "we should strike these bonuses," he said.