Geithner: Expand Federal Role, Consider OFC - Updated

Washington

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.