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Financial Planning > Behavioral Finance

FSB to G20: France Knocked Down a Wall

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Many developed countries are trying to fill holes in prudential regulation of financial services companies – and at least one has combined prudential oversight of banks and insurers.

Members of the Financial Stability Board (FSB), Basel, Switzerland, briefly mention the idea of combining bank and insurance regulation in a 33-page progress report prepared for the Group of 20 (G20) developed countries.

G20 leaders set up the FSB to help it come up with strategies for increasing the stability Earthof the world financial system.

The G20 leaders recently completed a summit in Seoul, South Korea, and concluded by endorsing an FSB policy framework for discouraging “systemically important financial institutions” (SIFIs) from taking excessive risk.

In that framework, the FSB lumps big insurers together with other types of SIFIs.

“SIFIs are financial institutions whose disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity,” the G20 leaders say in a summit press release.

The G20 leaders say a SIFI policy framework should include:

- A resolution framework and other measures to ensure that all financial institutions can be resolved safely, quickly and without destabilizing the financial system and exposing the taxpayer to the risk of loss.

- A requirement that SIFIs and initially in particular global SIFIs (G-SIFIs) have higher loss absorbency capacity to reflect the greater risks that these institutions pose to the global financial


- More intensive supervisory oversight for financial institutions which may pose systemic risk.

- Robust core financial market infrastructures to reduce contagion risk from the failure of individual institutions.

The FSB refers to insurers directly in a longer FSB progress report prepared for the G20 leaders earlier this month.

Developing recommendations for SIFIs is “very complex, as SIFIs vary in their structures and activities, and hence, in the nature and degree of the risks posed to the global financial system,” FSB officials say in their report.

The FSB will need time to learn how to extend the SIFI regulatory framework from just covering banks to covering a wider group of SIFIs, including “financial market infrastructures, insurance companies and other non-bank financial institutions that are not part of a banking group structure,” officials say.

The International Association of Insurance Supervisors (IAIS), Basel, Switzerland, will be helping the FSB assess financial institution systemic importance, “focusing on [companies'] size, interconnectedness and substitutability,” officials say.

By mid-2011, the FSB will come up with criteria for assessing problems at a troubled G-SIFI and recommendations for the types of laws that should be in place to ease the process of resolving a troubled multinational G-SIFI, officials say.

The IAIS is working on a paper on managing border-crossing insurance company crises, officials say.

In March, the IAIS released a remuneration principles draft that highlights issues “more specific to the insurance industry, such as the nature and complexity of an insurer’s risk profile and the alignment with the longer term interests of policyholders and beneficiaries,” officials report.

Regulators throughout the world are looking into repairing gaps in SIFI regulation, officials note.

In Europe, officials say, the European Commission is looking into the possibility of making sure an insurance policyholder protection program is available in all member countries, officials report.

Many countries are trying to ensure that financial regulation is as consistent as possible, officials add.

“In France, for example, the banking and insurance authorities were merged to establish the Prudential Supervisory Authority (ACP) in January 2010, notably to strengthen financial stability by creating a supervisory authority capable of monitoring risks across the financial sector and eliminating ‘blind spots’ in the monitoring,” officials say.

“Drawing on these works at the international and national level, the FSB will assess the appropriateness of the regulatory scope, and expand the regulatory perimeter to activities outside the banking sector, namely the shadow banking sector,” FSB officials say. “In particular, as regulatory requirements on the banking system tighten, the need intensifies for more systematic attention to activities in the shadow banking sector.”

FSB officials refer in the “shadow banking” section of the report to hedge funds, securitization operations and the credit rating agency system.


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