WASHINGTON BUREAU — Former Federal Reserve Board Chairman Paul Volcker is supporting the idea of offering insurers a national charter.
“Bring them – at least the big ones – under a framework,” Volcker testified Thursday at a House Financial Services Committee hearing on systemic risk.
Putting big insurers under the jurisdiction of a national regulator could keep the kinds of problems that have plagued American International Group Inc., New York, from happening again, Volcker said.
“I think a lot of the big insurance companies would welcome a national charter and the consistencies that would provide,” Volcker said. “I don’t want to permit them into the safety net. But I do think that they ought to be regulated in a consistent way.”
Volcker, who is credited for helping bring U.S. inflation under control in the 1980s, also gave his opinion about how federal regulators responded to the threat of AIG collapsing.
Officials at the Federal Reserve System and in the U.S. Treasury Department “had to make a very quick decision about an area that nobody could understand the full implications of,” Volcker said. “Everybody got in over their heads. And they did what was necessary in a very disturbed situation to provide money. And it’s become now, as you know, $150 billion, $180 billion, whatever it is. It’s, you know, outrageous in a sense. But I understand how they got there. That’s what we want to avoid.”
Preventing similar crises from occurring in the future will be complicated, because of the need to distinguish ordinary retail financial services activities from what appear to be riskier activities, Volcker said.
A bank customer should, for example, be able to walk into a bank branch and ask the bank to sell a batch of securities, Volcker said.
“If the bank is going to handle that, it’s going to have to have some kind of a trading operation, a foreign exchange operation,” Volcker said. “But there is a clear distinction between customer-related trading activity and pure proprietary trading.”
Some big institutions already have proprietary trading desks that are separate from the trading desks that serve retail customers, Volcker said.