Regulators should take a look at securities lending programs, according to New York Insurance Superintendent Eric Dinallo.
Dinallo talked about the topic here at the winter meeting of the National Association of Insurance Commissioners, Kansas City, Mo., at a meeting of the NAIC’s Life Insurance and Annuities Committee.
Operating securities lending programs can be a “wonderfully smart use of assets but also [can leave companies] vulnerable to extreme stress,” Dinallo said.
Companies that participate in securities lending programs offer securities they own to other institutions in return for borrowed cash.
The securities lender then receives payments equal to dividends and interest from the borrower of the securities and invests those funds.
At the end of the agreement, the securities lender gets the securities back and returns the cash with a payment for the use of the cash.
American International Group Inc., New York, used much of the cash it received through securities lending to invest in mortgage-backed securities, which took a hit when the real estate market faltered.