Tags: SIFI | regulation | Dodd-Frank | FSOC

Prudential Protests Designation as SIFI

By    |   Friday, 01 May 2015 08:10 AM

The Senate Banking Committee's Subcommittee on Securities, Insurance and Investment, chaired by Sen. Michael Crapo, R-Idaho, held a hearing April 30 titled "Examining Insurance Capital Rules and FSOC Progress" to look at the process for designating nonbank financial institutions as systemically important financial institutions (SIFIs) and the development of capital and other regulations by the Federal Reserve under the Dodd-Frank Act and by international regulators.

In his opening statement Crapo pointed to legislation empowering the Fed to tailor regulations to fit the specific characteristics of the insurance and banking industries.

Crapo also referred to a Government Accountability Office study he ordered last year that concluded that "FSOC's process lacks transparency and accountability, insufficiently tracks data and does not have a consistent methodology for determinations." He declared that he is looking for "bipartisan solutions" to address the issues posed by nonbank SIFIs by the Financial Stability Oversight Council (FSOC), including ways for companies to mitigate the risks they pose and to shed their SIFI designations. He echoed industry concerns that regulations under development by the European Union could disadvantage U.S. insurers due to differences in the regulatory philosophies of the EU and U.S.

Sen. Mark Warner, D-Va., the ranking Democrat, said it was not the intent of Dodd-Frank to create a "Hotel California" designation from which firms could not check out. He noted that the 2008 financial crisis did not respect national borders and that "the infamous AIG Financial Products whose derivatives blew up AIG was headquartered in London." He agreed with Crapo that regulations for insurance companies should be different from banking regulations. He concluded, "The ultimate goal of SIFI designation is to reduce risk and not just to add another layer of regulation."

The hearing revealed a clash of views between Robert Falzon, CFO of Prudential Financial, which along with MetLife, have opposed their designation as SIFIs, and Daniel Schwarcz, an associate professor at the University of Minnesota Law School, the witness invited by subcommittee Democrats.

The industry complains that the FSOC is wrongly assuming that the industry is distressed rather than making a determination based on an array of factors, including specific activities of the firms. Falzon argued, "The purpose of designations should be to regulate nonbanking firms that are engaged in risky activities that realistically 'could' cause the failure of the firm, not to regulate firms that are likely to fail."

On the other hand, Schwarcz warned that the policyholder-protection design of state risk-based capital rules might fail to fully account for systemic risk concerns. He observed that the financial services industry is changing rapidly and offering more bank-like products that present bank-like risks that could threaten the solvency of the firms. He suggested that the Fed's capital rules for insurance firms should require their assets to be marked to market and that firms should not be allowed to rely on their internal models in setting reserves.

This writer sees parallels to financial crises in other segments, such as savings and loans, housing government-sponsored enterprises and "too big to fail" banks in that the industry is fighting capital regulation, enlisting the cooperation of weak regulators, all with the support of a compliant Congress. It doesn't seem to have occurred to anyone that the Europeans might just be right in calling for stricter accounting and regulation.

(Archived video and witness statements can be found here.)

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Robert-Feinberg
The Senate Banking Committee's Subcommittee on Securities, Insurance and Investment held a hearing April 30 titled "Examining Insurance Capital Rules and FSOC Progress" to look at the process for designating nonbank financial institutions as systemically important financial institutions.
SIFI, regulation, Dodd-Frank, FSOC
558
2015-10-01
Friday, 01 May 2015 08:10 AM
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