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FDIC Rule Could Affect Insurers

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WASHINGTON BUREAU — The Federal Deposit Insurance Corp. (FDIC) has issued an interim final regulation that establishes rules for liquidating troubled, systemically important insurers.

The FDIC included rules for insurers in the regulation that apply to many types of systemically important nonbank financial companies.

The regulation gives the FDIC sole discretion over whether it will take a lien on insurance company assets if the FDIC is appointed receiver of an insurance company and if it provides funds to help with the orderly liquidation of the company.

The FDIC says in a preamble to the interim final rule that it would take a lien if it makes the determination, in its sole discretion, that the lien is “necessary for the orderly liquidation of the company” and “will not unduly impede or delay the liquidation or rehabilitation of the insurance company or the recoveries by its policyholders.”

The FDIC issued the rule to implement a provision in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The provision gives the FDIC the authority to take over a troubled nonbank based on a determination by the Federal Reserve Board, the Federal Office of Insurance, and the Treasury Department, in consultation with the FDIC, that the company is in default or imminent danger of default and that the company’s failure would have serious adverse effects on the nation’s financial stability.

The Obama administration has just named a director of the new Federal Insurance Office,

who would have participated in discussions at the Financial Stability Oversight Council (FSOC), and it has not yet named the voting FSOC member with insurance expertise.

The fact that the FDIC developed the regulation without having the insurance voices present at the FSOC has exacerbated insurance industry concerns about the regulation, the lawyer familiar with the regulation says.

At insurers, there is “a fear that the FDIC liens could somehow take precedence over insurance claims in the run off liquidation process,” the lawyer says.

Other lawyers note that the FDIC would serve only as backup to state insurance regulators and would intervene only if a state insurance department took more than 60 days to resolve problems at a systemically important insurer under its jurisdiction.

Even if the FDIC intervened, Dodd-Frank would require it wind down the troubled company using the company’s home state insurance laws, one lawyer says.

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