Treasury Secretary Timothy Geithner told a congressional committee today that he will ask for the authority to create a federal receiver for “systemically important” non-bank financial firms.
Geithner did not say whether the primary regulator of large, troubled insurance companies would be a federal or state agency.
Geithner spoke at a House Financial Services Committee hearing on the $165 million American International Group Inc. retention bonus program.
The hearing was the second the House Financial Services Committee has held on the AIG retention bonus program.
Geithner plans to return to the committee Thursday to unveil a broad overhaul of financial sector regulations that will include the resolution authority request.
AIG’s problems “highlight the need for a resolution authority with the power to manage the orderly restructuring of a large, complex, non-bank financial institution that poses a threat to the stability of our financial system,” Geithner said.
The new resolution authority would be modeled on the resolution authority that the Federal Deposit Insurance Corp. already has over banks, Geithner said.
Geithner said his request for resolution authority would put limits on that authority.
“Before taking any emergency action, the Treasury secretary would need to determine that resolution authority is necessary upon the positive recommendations of the Federal Reserve Board and the appropriate federal regulatory agency,” Geithner said.
In addition to asking for new resolution authority over non-bank financial institutions, the Obama administration will be asking for tighter oversight and controls over previously unregulated entities such as hedge funds and private equity funds.
A source familiar with the administration proposal says Geithner will ask Congress to make the Federal Reserve Board the systemic risk regulator and the FDIC the receiver of institutions deemed too big to fail.
Derivatives and financial instruments would be regulated through clearinghouses, and all financial institutions would be required to have increased capital levels.
Federal Reserve Board Chairman Ben Bernanke also testified at the House Financial Services Committee hearing. Like Geithner, he called for the federal government to have “resolution authority” over troubled non-bank financial institutions.
If the federal government had had resolution authority over AIG , New York, in September 2008, it “could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate,” Bernanke said. “That outcome would have been far preferable to the situation we find ourselves in now.”