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MetLife, Fed, Treasury Set to Testify on SIFI in Post-JPMorgan Loss Climate

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UPDATES with second House Financial Services Committee hearing regarding insurance this week, page two:

As anticipated, MetLife Inc. will be testifying at a previously scheduled Congressional hearing on the impact of the Dodd-Frank Act’s designation of systemically important financial institutions (SIFI) Wednesday before a House Financial Services subcommittee, but the news of JPMorgan Chase’s $2 billion in trading losses is sure to color the questioning of the panel, which includes banking regulatory experts.

MetLife President, Americas, William J. Wheeler is scheduled to testify on the second panel of the hearing before the Financial Institutions and Consumer Credit Subcommittee on May 16, along with Scott Harrington, of the Wharton School at the University of Pennsylvania, as well as representatives from the Brookings Institution and the US Chamber of Commerce. 

MetLife was one of four large financial institutions that on March 13 deemed to have failed a “stress test” imposed on large banking institutions by the Federal Reserve Board. 

Harrington is a healthcare economics and insurance and risk management specialist with expertise in  financial regulation and capital requirements. He is also a liability auditor for insurer bankruptcy, and is a member of the Federal Advisory Committee on Insurance governed by the Treasury and reporting to the Federal Insurance Office (FIO) Director and U.S. Treasury official Michael McRaith.

The witness list names Treasury’s Deputy Assistant Secretary for Financial Institutions Lance Auer, and a seasoned hand at the Volcker rule, on the first panel. 

The Committee did not return requests for comment on the hearing.

What may concern lawmakers, who will also be questioning Michael Gibson, director, of banking supervision at the  Board of Governors of the Federal Reserve System, is the Volcker Rule created by Section 619 of the Dodd-Frank Act.

Auer has worked on the question of designating financial market utilities as SIFIs and is a point man for lobbying meetings with bank and finance companies as well.

Auer had met with several JPMorgan Chase executives last September at the Treasury, according to the Dodd-Frank meeting logs provided by the Sunlight Foundation.

Of course, a SIFI-designated company would be subject to consolidated supervision by the Fed regardless of whether the company owned a bank or not.

The rule is supposed to limit the ability of systemically important, federally insured banks and SIFIs from engaging in speculative trading or investing in hedge funds or private equity funds with their own money. This is what JP Morgan has been faulted with, and it, along with many other companies including insurers, have  heavily lobbied the Fed against a too stringent or encompassing interpretation.

Insurance companies, especially, would argue the Fed needs to tread lightly, but in light of JPMorgan Chase’s trading oversight failures, insurers may have to pay the price. Political capital to take swings at the Volker Rule may be pinched back after the trading fiasco.

The insurance industry was granted a limited exemption to the rule through its lobbying efforts and the work of both former Sen. Chris Dodd, D-Conn., and Rep. Barney Frank, D-Mass.

But, the industry remains concerned that the way the last proposed rule was written, there will be unintended consequences for them.

Democrats had already been urging regulators to act promptly to publish a final version of the Volcker Rule before the JPMorgan Chase news hit.

The insurance industry has stated in a comment letter that the latest version of the proposed rule has the potential to raise premiums for customers and reduces their ability to provide options and innovative features in life and annuity insurance products by impeding an insurance company’s ability to manage its fixed income portfolio and to enter into and manage hedging transactions.

In a comment letter to the agencies on Feb. 13, the American Council of Life Insurers (ACLI) stated, “We are quite concerned, however, that the proposed regulations implement the Volcker Rule’s market making exception in a very restrictive way and would severely undermine market liquidity in the fixed income markets.”

The letter added, “We believe these unintended consequences in the proposed regulations deserve careful consideration and merit a reasonable solution.”

However, another agency, the Securities and Exchange Commission (SEC), had already been considering giving insurers a broad exemption from the Volcker Rule.

In answering a question at a House Appropriations Committee subcommittee hearing yesterday, SEC chairman Mary Schapiro said the agency is considering exempting insurer activity in covered funds as well as investments in their general account from the Volcker rule.

MetLife said in March over the stress test failure that amongst the things MetLife was penalized for by the Fed was the holding of funds of variable annuity customers in separate accounts. 

It remains to be seen how this plays out before July 21, 2012, when the rule is scheduled to be implemented. 

ongst the things MetLife was penalized for by the Fed was the holding of funds of variable annuity customers in separate accounts. 

It remains to be seen how this plays out before July 21, 2012, when the rule is scheduled to be implemented. 

A second hearing, titled “U.S. Insurance Sector: International Competitiveness and Jobs,” will be held before the HFSC’s  Insurance, Housing and Community Opportunity Subcommittee the following day. Thursday, May 17, kicking off with McRaith, followed by  NAIC president and Florida Insurance Commissioner Kevin McCarty, William Toppeta, Vice Chairman, MetLife, Inc., Transatlantic Reinsurance Co. CEO Michael  Sapnar, and consumer advocate Peter Ralph Kochenburger, executive director, Insurance Law Center, University of Connecticut School of Law, among others.

 Arthur “Dave” Postal contributed material to this article.



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