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Competitive impact, financial market stability debated in AIG SIFI designation hearing

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Members of the Financial Stability Oversight Council who voted in favor of rescinding American International Group Inc.’s “too big to fail” tag cited concerns about adversely impacting competition in the insurance sector and the politicization of the designation process.

But those who voted against rescinding the designation believe that material financial distress at the New York-based insurer could continue to pose a threat to the financial stability of the United States.

By a 6-3 vote on Friday, the Financial Stability Oversight Council rescinded AIG’s designation as a systemically important financial institution, which subjected the insurer to stricter oversight and stricter capital requirements. Since the 2008 financial crisis, the FSOC has held the responsibility of evaluating companies and had designated four nonbank institutions, including AIG, as SIFIs.

A document released by the FSOC on Monday outlines the views of several council members voting for and against the designation. The discussion, which was led by Treasury Secretary Steven Mnuchin, took place in executive session.  

Keith A. Noreika, acting comptroller of the currency, voted in favor of rescinding AIG’s SIFI designation because of concerns about the FSOC’s authority and ability to designate individual nonbank companies for bank-like regulation.

“I am concerned that by picking institutions from among similarly situated competitors within the same industry and labelling one systemically important and not the other, we may adversely affect the competitive environment in unfair and arbitrary ways,” he said. “This effect often serves the most politically powerful and well-connected firms.”

The process “has become politicized and invariably forces the council to pick ‘winners and losers’ from among firms in a competitive industry,” Mr. Noreika added.

AIG has taken several steps to reduce the potential effects that distress at its company would have on other firms and markets, he said.

“AIG has divested and wound down certain business lines and its market share in certain key markets has decreased,” Mr. Noreika said. “In addition, the capital markets’ exposures to AIG have decreased substantially since 2013, and exposures arising from the company’s insurance products do not appear to contribute significantly to any adverse systemic impact. These actions have substantially reduced the risk of a threat to the financial stability of the United States by material financial distress at AIG. Still, those who dissent from the majority decision (Friday) would brand the company with a scarlet letter by designating it a SIFI because of its history.”

But Martin J. Gruenberg, chairman of the Federal Deposit Insurance Corporation, voted against rescinding the designation because of ongoing concerns about the “disruptive effects” asset liquidations at the insurer would have on the broader financial markets and increases in certain exposures, particularly in AIG’s life insurance and annuity business.

“AIG remains a large, complex, highly interconnected global organization operating in multiple states and foreign jurisdictions with numerous internal interdependencies presenting significant challenges to its orderly resolution in the event of its material financial distress or failure,” he said. “In light of these considerations, I respectfully dissent.”

Mr. Noreika accused the dissenters of trying to “scuttle” the de-designation of AIG long after it posed any meaningful systemic threat to the U.S. financial system with “insatiable process concerns.”

But Richard Cordray, director of the Consumer Financial Protection Bureau who opposed rescinding the designation, noted that the de-designation vote occurred with the support of only six of the 10 FSOC members after Securities and Exchange Commission Chairman Jay Clayton recused himself. Mr. Cordray also agreed with Mr. Gruenberg’s contention that “material financial distress at AIG not only could pose, but actually does continue to pose, a threat to the financial stability of the United States.”

Roy Woodall, the council’s independent member with insurance expertise, voted in favor of removing AIG’s SIFI designation.

“I believe that today’s AIG is a different organization, approximately half the size it was at the time of the financial crisis and, therefore, no longer satisfies the first determination standard under which it was designated,” he said.

Mr. Woodall did express continued concern about some of AIG’s activities, including those relating to annuities with guaranteed features.

“Although I do not personally believe these activities would justify continuing to regulate AIG as a SIFI at this time … I do believe they should continue to be monitored from a macro-prudential perspective,” he said.