Financial services industry representatives today called for Congress to expand the federal government’s role in insurance regulation.

The House Financial Services Committee held a hearing on how financial regulation should be restructured to reflect the lessons learned from the current meltdown.

The witness list included Edward Yingling, president of the American Bankers Association, Washington; Timothy Ryan, president of the Securities Industry and Financial Markets Association, New York, and a former director of the Office of Thrift Supervision; and Steve Bartlett, president of the Financial Services Roundtable, Washington.

“Given the current problems in the financial markets, it would be a remarkable oversight for Congress not to develop a federal approach to insurance regulation,” Yingling said.

The “difficulty of entering the U.S. markets under the current state regulatory system dissuades foreign capital from investing in the U.S., thereby restricting overall insurance capacity and reducing the number of insurance products available to U.S. consumers,” Yingling said. “Relatively few foreign companies are willing to expend the time and resources necessary to navigate all of the harbors in our state-based regulatory system.”

Ryan suggested that, at the very least, Congress should consider creating a financial markets stability regulator.

This regulator should at least have power “over systemically important financial institutions,” Ryan said.

The office should have the authority, alone or in coordination with a large insurer’s functional or prudential regulator, to set consolidated capital requirements at the parent company level and to recommend capital requirements at any subsidiary level, Ryan said.

The office also should have the authority to examine the parent company and any of its subsidiaries, and to bring enforcement actions, Ryan testified.

The powers of the office “could correspond to those that the Federal Reserve currently has as the umbrella supervisor of bank holding companies,” Ryan said.

In addition to creating a financial markets stability regulator, Ryan said, Congress should, “in addition, consider the creation of a federal insurance charter and a federal insurance regulator.”

Bartlett, who spoke for the FSR, said Congress should strengthen oversight over the insurance markets by creating an optional federal charter.

Alice Rivlin, an NYSE Euronext board member who served as director of the federal Office of Management and Budget from 1994 to 1996 and as vice chair of the Federal Reserve Board from 1996 to 1999, advised against reinstating the financial services industry restrictions that were removed by the Gramm-Leach-Bliley Financial Services Modernization Act of 1999.

“I don’t think we can go back to a world where we separate the different kinds of financial services,” Rivlin said. “That didn’t work.”

Congress should not bring back barriers between the sale of banking, securities and insurance products, and it should not reintroduce the barriers that limited interstate banking from 1927 to 1994, Rivlin said.

Officials at the National Council of Insurance Legislators, Troy, N.Y., sent the committee a letter stating that states will try to keep the current, state-based insurance regulatory system.

“The stability of state-regulated insurance companies during this ongoing financial crisis, as compared to other financial sectors, demonstrates the effectiveness of our state insurance laws and regulations,” NCOIL officials write in the letter.

“While finger-pointing will not repair the problems with the present system, we are proud to note that state-regulated insurers were largely unharmed when compared to federally regulated banking and investment institutions,” NCOIL officials write.