WASHINGTON BUREAU — Any new oversight system for big, non-bank financial institutions must complement, rather than displace, the “coordinated, national system of state-based insurance supervision,” an insurance regulator told the House today.
Thomas Sullivan, the Connecticut insurance commissioner, was testifying on behalf of the National Association of Insurance Commissioners, Kansas City, Mo., at a House Financial Services Committee hearing on the Financial Stability Improvement Act discussion draft.
Another witness, Steven Kandarian, chief investment officer at MetLife Inc., New York, (NYSE:MET) said Congress must ensure that all the pieces included in the regulatory reform bills they are drafting fit together.
MetLife is particularly concerned about “how new regulators and regulatory structures would coordinate with existing regulators and regulatory structures, both on the domestic and the international front,” Kandarian said.
The FSIA draft is the product of efforts by the U.S. Treasury Department and the House to create a system for handling serious problems at large, “systemically important” financial services companies.
The FSIA draft would give a proposed Financial Services Oversight Council responsibility for determining whether an institution was systemically risky.
Only federal financial services regulators could be FSOC voting members. A state insurance regulator and a state banking regulator would be advisory members.
The Fed would be the systemic regulator, and it would make recommendations about the corrective actions needed to keep a potentially troubled institution solvent. The Fed would have to consult with state regulators before making those recommendations.
The Federal Deposit Insurance Corp. would have broad authority to resolve insolvent institutions declared systemically risky.
Insurance industry lawyers said they have not completed their analysis of what authority the FDIC would have to resolve systemically risky institutions.
The FSIA draft also would give the government broad authority to have large financial institutions cover the cost of resolving a troubled large bank, insurer, securities firm or hedge fund.
“A regime change that results in redundant, overlapping responsibilities will result in policyholder confusion, market uncertainty, regulatory arbitrage and a host of other unintended consequences,” Sullivan said.
Sullivan cited the problems at American International Group Inc., (NYSE:AIG) in his congressional testimony, noting that the insurance subsidiaries remained solvent “while the holding company spiraled into failure.”
“The NAIC’s solvency and capital standards have ensured that policyholder commitments are met and companies remain stable,” Sullivan said. “State regulators have placed appropriate restrictions on the investments held by insurers.”
The FSIA draft should be revised to “wall off” of insurance company holdings from the broader holding company, and there should be federal-state coordination on a proposed Financial Services Oversight Council, to facilitate information sharing, Sullivan said.
The current draft of the bill limits state insurance and banking regulators to having an advisory role on the council.