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Geithner: Expand Federal Role, Consider OFC - Updated

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The Obama administration today asked Congress for the authority to give a federal regulator “resolution authority” — and supervisory power — over large insurers as well as over other non-bank financial institutions.

Treasury Secretary Timothy Geithner has described the request in a written version of the testimony he now is delivering at a House Financial Services Committee hearing on the Treasury Department’s financial services regulation proposal.

The Treasury Department is using the term “resolution authority” to refer to the authority to seize and restructure troubled companies.

Geithner says the resolution authority should apply to “bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm posing substantial risk to our economy.”

In addition to resolution authority, “the single systemic regulator will also need to impose liquidity, counterparty, and credit risk management requirements that are more stringent than for other financial firms,” Geithner says. “For instance, supervisors should apply more demanding liquidity constraints, and require that these firms are able to aggregate counterparty risk exposures on an enterprise basis within a matter of hours. The entity regulating these entities will also need a prompt, corrective action regime that would allow the regulator to force protective actions as regulatory capital levels decline, similar to that of the [Federal Deposit Insurance Corp.] with respect to its covered agencies.”

Whether the federal regulator with the new authority would use that authority to regulate a troubled company would depend on “the financial system’s interdependence with the firm, the firm’s size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding,” Geithner says in the written testimony.

The federal regulator also would consider the importance of the financial institution “as a source of credit for households, businesses, and governments and as a source of liquidity for the financial system,” Geithner says.

The request for federal authority over non-bank financial institutions is only a first step, Geithner says.

A more comprehensive framework for regulatory reform, to be released “in the coming weeks,” will cover consumer and investor protection, elimination of gaps in the regulatory structure, and international coordination as well as systemic risk, Geithner says.

“Let me be clear,” Geithner says. “The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end. We must cover financial institutions that have the potential to pose systemic risks to our economy but that are not currently subject to the resolution authority of the FDIC.”

Optional Federal Charter Or Insurance Information Office?

During oral testimony at the hearing, Geithner expressed support for any legislation, such as measures to create an optional federal charter system or a Treasury Department Office of Insurance Information, that could help the Obama administration understand and oversee insurance.

Advocates of the OFC approach want to give insurers a choice between coming under the jurisdiction of state or federal insurance regulators.

When Rep. Edward Royce, R-Calif., the sponsor of an OFC bill that may be coming out next week, asked about the OFC concept, Geithner said, “There’s a very good case for optional federal charter legislation to be introduced.”

Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services Committee capital markets subcommittee, who introduced an OII bill that died on the House floor in September 2008, asked Geithner about his views on establishing an OII.

“I would not be opposed to an OII being established quickly,” so as to create more insurance expertise at the Treasury Department, Geithner said. “We would look forward to any help you could provide to us in that area.”

State Regulator Reacts

New York Insurance Superintendent Eric Dinallo said in an interview that he believes Geithner is doing a good job.

“At least he is doing something, rather than nothing,” Dinallo said.

Geithner’s plan “is a serious plan,” Dinallo said.

But Dinallo said it should be recognized that insurance companies, including very large insurance companies, are different from financial supermarkets and other types of large, leveraged financial institutions.

Large insurers “don’t present the same systemic risk,” Dinallo said. “The slow conservative business of insurance or commercial banking standing alone do not present systemic risk… It wasn’t the insurance companies that caused this problem at [American International Group Inc.]“

Regulators already have the authority to stop a run on a bank, but even stopping a run on a bank is not really a matter involving systemic risk, Dinallo said.

But Dinallo said the parties involved with the overhaul discussions “should remain flexible, not idealogical.”

“It took Treasury Secretary Henry Morgenthau and President Franklin Roosevelt 10 years to work out of the depression,” Dinallo said. “We can’t just give Mr. Geithner 10 weeks. And, we have to try different things.”

A copy of Geithner’s written testimony is available here.

An outline of the Treasury Department’s proposal is available here.

CORRECTION: An earlier version of this article gave an incorrect description of the scope of Geithner’s proposal.


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