Don't Close Us Out Of Systemic Risk Regulation, Says NAIC

NU Online News Service, Oct. 29, 3:49 p.m. EDT

WASHINGTON–Legislation to control non-bank firms large enough to pose systemic financial risk should complement not displace state regulation, an insurance commissioner told House lawmakers.

Connecticut Insurance Commissioner Thomas Sullivan, representing the National Association of Insurance Commissioners, made his statement at the House Financial Services Committee hearing on the proposed "Financial Stability Improvement Act."

That House measure proposed by the Treasury Department would include regulation of insurance firms large enough to have system wide impact. It should not replace "the current, coordinated, national system of state-based insurance supervision," said Mr. Sullivan.

The proposed legislation was defended by a member of the Federal Reserve Board and Treasury Secretary Timothy Geithner.

Daniel Tarullo, a governor of the Federal Reserve System, said federal oversight would prevent troubled financial institutions which have received aid from the Troubled Asset Relief System from gaming the system by withdrawing from any federal regulation in the future.

The hearing was held in preparation for a markup of next week of a draft of the legislation, which is a compromise measure drafted by the Treasury Department and Rep. Barney Frank, D-Mass., chairman of the committee.

Under its provisions, federal banking regulators would be given broad authority to regulate large, troubled insurers as well as resolve them, as necessary.

Mr. Sullivan said the bill would create, "A regime change that results in redundant, overlapping responsibilities that will result in policyholder confusion, market uncertainty, regulatory arbitrage and a host of other unintended consequences."

He cited the problems of American International Group in his congressional testimony, noting that the insurance subsidiaries remained solvent "while the holding company spiraled into failure" after risky bets on derivatives by its financial products unit.

He added that, "The NAIC's solvency and capital standards have ensured that policyholder commitments are met and companies remain stable. State regulators have placed appropriate restrictions on the investments held by insurers."

He also said that the proposed legislation should be revised to "wall off" of insurance company holdings from the broader holding company, and suggested federal-state coordination on a proposed Financial Services Oversight Council to facilitate information sharing.

The current draft of the bill only gives state insurance and banking regulators an advisory role on the council.

Any new regulatory scheme should also "respect the strong policyholder protections states have in place," said Mr. Sullivan, and he remarked that "multiple sets of eyes" in the examination of holding companies "allows for checks and balances."

Of particular concern to the insurance industry is language that would remove the restraints on the Federal Reserve Board's authority over companies subject to consolidated regulation under the 1999 Gramm-Leach-Bliley Act.

Regarding the GLB provision, Mr. Tarullo said "such a provision would serve as a kind of insurance policy against the possibility of a firm that opted for the benefits of being a bank holding company during the financial crisis deciding to exit that status during calmer times."

Mr. Tarullo said the legislation would close an "important gap in our regulatory structure by providing for all financial institutions that may pose significant risks to the financial system to be subject to the framework for consolidated prudential supervision that currently applies to bank holding companies."

Mr. Tarullo added that a consolidated banking supervisor "needs the ability to understand and address risks that may affect the risk profile of the organization as a whole, whether those risks arise from one subsidiary or from the linkages between depository institutions and nondepository affiliates."

He added that Rep. Frank's proposal would make useful modifications to the provisions added to the law by the Gramm-Leach-Bliley Act in 1999 that limit the ability of a consolidated supervisor to monitor and address risks within an organization and its subsidiaries on a groupwide basis."

In his testimony, Secretary Geithner, said the proposed legislation "represents a comprehensive, coordinated answer to the moral hazard problem posed by our largest, most interconnected financial institutions."

He added that "it creates a strong, resilient, well-regulated financial system that can better absorb failure when it happens."

And, Secretary Geithner added, "it establishes a resolution regime allowing the government, when the financial system is at risk, to unwind and break up a failing financial firm without imposing costs on taxpayers."

,