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Potomac Watch: Thrifty Regulation

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Insurance companies which operate savings and loans should not be surprised that federal regulators are proposing to use different metrics than they are currently using to oversee them as their consolidated regulator.

There appears to be great anxiety in the industry over the proposed rules.

Indeed, one comment letter from a property and casualty insurer said that the new rules “could threaten the existence of the savings and loan holding company industry.”

Another called it a “sea change” from existing regulation, adding that, the new rules propose a banking standard “that bears no meaningful relationship to the allocation of capital and use of leverage in the insurance world.”

While these comments imply that insurers which operate thrifts will fight even the presence of federal regulators, if they do so they are fighting a losing battle.

That’s because absent a super-majority of Tea Party members in the next Congress, insurers which need thrifts to provide financial services to their clients are going to have to live with some form of regulation by the Federal Reserve Board or the Office of the Comptroller of the Currency.

They might get imposition of the rules delayed, and they might get them adjusted to better reflect the differences between their businesses and the banking business.

In fact, it is highly unlikely that, given the fact that more than 500 comments have been received on the thrift holding company and other issues involving capital of financial companies, that the rules will go into effect in January as proposed.

However, the thrift business is a banking business, and the federal regulators are merely acting to implement a federal law enacted to reflect the fact that the federal government provided more than $12 trillion to support the economy in the wake of the 2007-2009 economic collapse.

While members of Congress will be writing letters urging reasonableness in interpreting the law, it is quite unlikely whoever is president, that stronger federal oversight of those operating savings and loans will not take place.

AIG, whose near-failure is responsible for these rules, acknowledged in its comment letter on the issue that for insurers with thrifts, the proposed rules “do not merely represent a change in regulatory capital requirements and supporting infrastructure, but rather an entirely new framework for assessing capital.”

But, AIG said, “as stated publicly on numerous occasions, we believe that effective holding company regulation is critical to ensuring the safety and soundness of the financial system.”

Instead of fighting tooth-and-nail, AIG officials imply in their letter, they believe that many aspects of the framework used by state insurance regulators to evaluate capital and liquidity should be extended to consolidated company regulation.

 Therefore, AIG said, it is encouraging the federal agencies to work with other state and national-level supervisors “to refine existing insurance company supervision standards and develop a common regulatory capital framework for global insurers.”

In regular quarterly comments late in October, Christy Romero, the Inspector General of the Troubled Asset Relief Program (TARP), noted that Robert Benmosche, AIG president and CEO, had recently stated that AIG was looking into selling its thrift because operating it would make it difficult to continue doing certain things AIG does as an insurance company.

But, she said, even if AIG sells its thrift, it should be subject to federal regulation.

“Taxpayers still on the hook for billions of dollars for their TARP investment in AIG deserve to have strong regulation of AIG, whether AIG keeps or sells the bank,” Romero said in the report.

“Taxpayers need to be protected against the potential impact of any future AIG financial distress on the broader economy based on AIG’s size, as one of the largest insurance companies in the world, and interconnectedness,” she said.

Her comments mirrored broad concern, in Congress as well as throughout the nation, about the potential impact that an AIG insolvency would have had on the U.S. economy.

Also, there were other insurers who sought federal aid during the trying 2007-2009 period, and who are still feeling the impact of that economic downturn.

Members of Congress may seek to distance themselves from the current battle over the rules, and provide insurance companies with sympathy, usually in connection with a campaign contribution, but there is no political support, whatever is said on the campaign trail, for continuing the status quo ante. It’s just not going to happen.


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