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GOP call to end SIFIs raises question of who will mind the store

GOP call to end SIFIs raises question of who will mind the store

The chairman of the House Financial Services Committee's call to strip the Financial Stability Oversight Council of the ability to designate insurers and others as systemically important financial institutions leaves unanswered the question of how insurance groups should be regulated.

In remarks prepared for an address to the Economic Club of New York last week, Rep. Jeb Hensarling, R-Texas, outlined details of the Financial CHOICE Act, a Republican plan to replace the Dodd-Frank Wall Street Reform and Consumer Protection Act. CHOICE stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs.

Rep. Hensarling took aim at FSOC, which has the power to designate financial institutions as SIFIs subject to heightened capital requirements and reporting rules. Two insurers — American International Group Inc. and Prudential Financial Inc. — carry the designation. A third— MetLife Inc. — successfully challenged the designation in U.S. District Court, but the federal government is appealing.

“Much criticism has centered on FSOC's lack of transparency,” Rep. Hensarling said in his prepared remarks. “But more troubling is its vast powers under a vague mandate. Dodd-Frank gives FSOC the ability to designate companies as too big to fail if it 'determines that material financial distress' at the company 'could pose a threat to the financial stability of the United States.' But nowhere in Dodd-Frank, or anywhere else in the U.S. Code for that matter, are these terms defined.”

To end “taxpayer-funded bailouts” of financial institutions, “we must also end Washington's ability to designate any institution as 'systemically important,' ” Rep. Hensarling said. “It becomes a self-fulfilling prophecy. Our Republican reform plan repeals FSOC's authority to designate so-called SIFIs going forward and retroactively repeals FSOC's previous SIFI designations.”

The National Association of Mutual Insurance Cos. hailed the proposal.

“Main Street mutual insurance companies, and property/casualty insurers in general, should never have been the target of federal over-reach or the overreaction by Congress following the 2008 financial crisis,” said Jimi Grande, senior vice president of federal and political affairs for NAMIC in Washington in a statement. “The outline for reform proposed today by Chairman Hensarling seeks to restore the proper balance to our financial regulation to ensure a fair and open system for all.”

“There are problems with the way that Treasury has been handling the SIFI designation, but that shouldn't be any reason to get rid of the SIFI concept,” said Lawrence Mirel, a former commissioner of insurance, securities and banking for the District of Columbia and now vice president-director of government affairs for insurance consultant Goldwater Taplin Group in Washington. “It is at least conceivable that an organization that includes insurers could have a negative impact on the financial system, which is the whole point.”

“Maybe it says we won't regulate certain large insurers as systemically important, but how will we regulate?” said William Goddard, a partner in the Hartford, Connecticut, office of Day Pitney L.L.P. who advises clients on insurance regulation.

“You have to be able to regulate an entire group or enterprise,” said Mr. Goddard. He cited AIG as an example. “Who was watching the whole AIG enterprise? The Office of Thrift Supervision,” he said. He pointed out that a noninsurance subsidiary of AIG became involved in risky credit default swaps that ultimately brought the company to the brink of collapse in 2008. That led to more than $180 billion in federal assistance under which the government took an almost 80% ownership of AIG.

“We have to have some way to look at the entire enterprise, entities that might not have the thorough oversight of state insurance regulation,” said Mr. Goddard, adding that insurers are “well regulated” by the states.

“Somebody's got to regulate for groups and enterprises, and somebody's got to regulate for systemic interaction,” said Mr. Goddard. “Somebody's got to look out for the health of the financial system as whole, and somebody's got to look at these large financial enterprises holistically.”

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