The Obama administration plans to launch its effort to overhaul regulation of the financial services industry by seeking authority to regulate large non-bank institutions such as insurance companies and place them into conservatorship or receivership if they run into trouble.
That proposal, unveiled in March 26 testimony before Congress, is stirring great concern within the industry because it could have a substantial impact not only on the underlying insurance subsidiaries of an insurance holding company, but on the current, state-regulated resolution and guaranty system.
Treasury Secretary Timothy Geithner said the plan to regulate large insurers is only the first step in the federal government’s plan to overhaul financial services regulation in the wake of the current financial crisis.
Under questioning by members of the House Financial Services Committee, Geithner defended the current, state-based insurance regulatory system.
But, in answering questions and in follow-up comments by Treasury aides on a background basis, he made clear that after the priority issue of dealing with systemic risk is completed, Treasury is interested in examining whether an optional federal charter for insurers should be established.
“I think that we have to start by making sure we have in place effective, consolidated supervision over those entities that could pose potential risk to the system,” Geithner said. “Now, that does not mean that we should supplant and take away the existing
authorities that state insurance supervisors have over those institutions or that the bank regulators have over depositories.”
At the same time, he said that, going forward, “a good case” could be made for allowing carriers to choose to continue to
be regulated under the state-based insurance system or opt for oversight
under a new federal regulator.
He made this comment in answering a question by Rep. Ed Royce, R-Calif., co-sponsor of legislation, along with Rep. Melissa Bean, D-Ill., scheduled to be introduced April 2 that would create an optional federal charter for insurers, and impose strong consumer protections.
Also, in response to a question by Rep. Paul Kanjorski, D-Pa., chairman of the Capital Markets Subcommittee of the House Financial Services, about creating an Office of Insurance Information with the Treasury, Geithner replied, “I would not be opposed to an OII being established quickly” so as to create more insurance expertise in the Treasury Department.
“We would look forward to any help you could provide to us in that area,” he said.
The comprehensive framework for regulatory reform will cover four broad areas: systemic risk; consumer and investor protection; eliminating gaps in our regulatory structure; and international coordination, Geithner said.
“In the coming weeks, I will present detailed frameworks for each of these areas,” he added.
“Let me be clear: 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,” Geithner said.
“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,” he added.
“This would include 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,” he said.