Tags: FSOC | SIFI | Wallison | insurance

AEI Launches Offensive Against FSOC — Part II

By    |   Tuesday, 13 May 2014 07:59 AM

The first article in this trilogy set the stage for the presentation hosted by the American Enterprise Institute (AEI) on May 6 to air industry arguments against the designation by the Financial Stability Oversight Council (FSOC) of a handful of U.S. insurance companies and asset managers as systemically important financial institutions (SIFIs) that are subject to enhanced supervision by the Federal Reserve.

The purpose of the meeting was to brief congressional staff as to why the industry either is incensed that SIFI is doing this or wants to convey the impression that it is.

Four speakers made presentations at the event, and three of them conveyed a sense of intense anger combined with a bit of puzzlement as to why the FSOC is taking this course. This is consistent with the strategy the financial lobbies have pursued, at least since the enactment of Dodd-Frank, of portraying themselves as the victims, certainly not the perpetrators, of the ongoing, permanent financial crisis.

Two of the speakers, Peter Wallison of AEI and Rep. Scott Garrett, R-N.J., gave very detailed, lawyer-like presentations of the industry objections to being designated SIFIs.

Dan Gallagher, a lawyer and commissioner of the Securities and Exchange Commission, made an impassioned, but off-the-cuff, speech against the designation of asset managers as SIFIs. Gallagher spoke with the candor of someone who gives an after-dinner toast and gets a bit carried away, although no adult beverages were in evidence.

Finally, Paul Kupiec, an economist who is a colleague of Wallison at AEI and who worked for two SIFIs, JPMorgan Chase and Freddie Mac, before Dodd-Frank was passed, spoke without notes and got a bit tangled up as he explained why imposing capital requirements on financial institutions stifles economic growth.

The three huge insurance companies under consideration by the FSOC for SIFI designation are Prudential, MetLife, and AIG. Of the three, Prudential is the one that has challenged the designation, and opponents have made much of the fact that the one member of the FSOC who represents expertise in the insurance industry, Roy Woodall, filed a sharp dissent. (Another way to look at it is that because of that very expertise, he represents the industry's viewpoint and is unable to be objective.)

Wallison spoke twice. At the beginning of the event he complained that the process the FSOC is using to designate insurance companies as SIFIs is lacking in standards and could prove damaging to nonbank institutions that have provided a growing share of financing for the U.S. economy, as he illustrated with a chart.

In his second statement, Wallison laid out in great detail the origin of a group called the Financial Stability Board (FSB), which was established at the direction of the G-20 in the wake of the 2008 episode in order to establish tighter financial regulatory standards that would then be implemented by the respective countries. He accused the financial regulators of holding the view that the authorities need to crack down on financial functions labeled as "shadow banking" and "asset transformation." The industry is accusing U.S. regulators, in effect, of conspiring with European regulators who dominate the FSB to port this attitude over to the United States to the detriment of the U.S. economy.

Another way of looking at this is that the 2008 episode revealed that tighter financial regulation was overdue, and the leaders of the G-20 were desperate to restore confidence in financial markets. The international regulators are doing exactly what they're supposed to do, and the industry is resisting on the basis that it is regulation, not reckless banking and finance, that lead to protracted periods of slow growth in the developed countries.

(Archived video can be found here.)

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The American Enterprise Institute hosted a presentation to air industry arguments against the designation by the Financial Stability Oversight Council of U.S. insurance companies and asset managers as systemically important financial institutions.
FSOC, SIFI, Wallison, insurance
Tuesday, 13 May 2014 07:59 AM
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