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Financial Planning > Behavioral Finance

Insurers to Geithner: Look at the Connections

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The Financial Stability Oversight Council (FSOC) should look at a nonbank financial companies’ commitments to counterparties when deciding whether the company might need extra scrutiny, according to the American Council of Life Insurers (ACLI).

Julie Spiezio, a senior vice president at the ACLI, Washington, has given that advice in a comment letter submitted to the U.S. Treasury Department in response to department efforts to implement some nonbank financial company supervision requirements included in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Dodd-Frank created the FSOC and gave it the authority to decide, under Section 113 of the Dodd-Frank compassDodd-Frank Act, whether some nonbank financial companies are so large and systemically important that they ought to be given extra attention by the Federal Reserve Board.

The Treasury Department has asked for comments on oversight of nonbank financial companies, and it also put out a separate notice seeking public comments on implementing the “Volcker Rule” provision of the Dodd-Frank Act. That provision is supposed to limit the ability of a company with any explicit or implicit federal backing to trade for its own account.

Spiezio emphasizes in the ACLI comment that an insurer that is acting as a traditional insurer typically engages in cautious, carefully supervised investment activities that are unlikely to pose a threat to the stability of the financial system.

The “FSOC should conclude that life insurance companies engaged primarily in traditional insurance activities are not systemically significant and should not be designated under section 113″ for extra attention, Spiezio says.

Elsewhere, Spiezio discusses the ACLI’s views on how FSOC officials might identify potentially systemically significant nonbank financial companies.

“We believe interconnectedness and the degree of primary regulation

are most relevant in the designation process,” Spiezio says. “Interconnectedness is the paramount consideration in assessing whether activities or material financial distress of an individual firm could pose a threat to the financial stability of the U.S. Lacking interconnection, an entity may be a risk to its customers, employees, and owners but would not constitute a risk to other companies or to the system as a whole.”

Regulators could measure interconnectedness for a nonbank financial company by looking at the total volume of transactions and commitments with each of its largest counterparties, the size of the transactions and commitments with the most heavily used counterparties, and the number of counterparties whose total transaction volume is above a certain size threshold, Spiezio says.

The FSOC might, for example, be able to use a network model or map to identify systemically important institutions, Spiezio says.

In the comment on the Volcker Rule, Spiezio asks regulators to be sure to act on what the ACLI believes to be the intent of Congress to exempt life insurance and annuity separate accounts from any new restrictions, and to be sure insurers continue to have the ability to continue the sorts of general account investment and portfolio hedging arrangements they now typically use, including the ability to invest in hedge funds and private equity funds.


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