AIG’s SIFI designation delayed

The Financial Stability Oversight Council (FSOC), chaired by Treasury Secretary Timothy Geithner, is holding off designating American International Group as a systemically important financial institution, perhaps into next year, according to several sources.

Meeting today, it was anticipated that the FSOC would designate AIG as a SIFI (systemically important financial institution), meaning it would come under the supervision of the Federal Reserve Board and be subject to enhanced  capital equirements, liquidity requirements, short-term debt limits nad public disclosures, as mandated under the Dodd-Frank financial services reform law.

However, National Underwriter has learned from a source that AIG’s designation would likely be delayed until later this month at the earliest.

Such a designation was anticipated after the sale of Treasury’s 15.9 percent remaining stake in AIG. Such a move would have made it the first insurance company SIFI placed under the Fed’s purview.

Various sources cited several issues, including the fact that the process was complex, it had started in April, for example, and a number of steps are required under the law before such a designation is made.

Moreover, one source noted, the process is going to be deliberate because court challenges are anticipated in some cases, and the staff and FSOC members want to ensure that such a designation would be not be rejected by a court for technical reasons.

Moreover, amongst the sources, both within and outside government that were contacted, several noted that “this is a monumental step,” and one noted that no timetable has been established under the Dodd-Frank Act for such a designation by the FSOC. The timetable is not mandated under law.

Federal Insurance Office (FIO) Director Michael McRaith much earlier in the year suggested the timing of the SIFI process would be somewhat coordinated with the international supervisory community’s own designation of global systemically important insurers, or G-SIIs, for which AIG, along with many other insurers, has submitted its data.

When a traditional insurance business fails, not every car owner is going to get into a car accident immediately upon dissolving,…there is not the same prospect of a run,” McRaith told a House Financial Services subcommmittee panel on Insurance, Housing and Community Opportunity chaired by Rep. Judy Biggert, R-Ill., on May 17.

FIO, he added then, is working with the IAIS [International Association of Insurance Supervisors] on the “criteria, methodology and timing” of SIFI designations “so no U.S. insurer is disadvantaged through global designation of [SIFIs],” McRaith told lawmakers.

McRaith also noted that if “we were to go back several years,” the FSOC would find AIG systemically risky and that it was important to look at a company as a whole, not just the traditional insurance enterprise “and look under the hood” to see if there is any systemic risk. 

Several sources also noted that the “deliberate” and “complex” process involved also includes a mandated vote by the voting members members of the FSOC. Roy Woodall, the one insurance expert confirmed by the Senate has a vote. Missouri Insurance Commissioner John Huff and FIO’s McRaith are the other nonvoting members of the FSOC steeped in the insurance sector. The FSOC consists of 10 voting members and 5 nonvoting members and brings together the expertise of federal financial regulators, state regulators, and the independent insurance expert appointed by the President.

The other nonvoting members, who serve in an advisory capacity, are the director of the Office of Financial Research; a state banking supervisor designated by the state banking supervisors; and a state securities commissioner(or officer performing like functions) designated by the state securities commissioners.

The state insurance commissioner, state banking supervisor, and state securities commissioner serve two-year terms.

At the same time, in comments Tuesday in Geneva that took place as the Treasury Department announced it was divesting the last of its AIG holdings, Robert Benmosche, president and CEO of AIG, said that large financial companies need a federal consolidated supervisor, but that supervision should be targeted and not blanket.

Benmosche, said that strong, consolidated oversight, including, for example, additional capital, “should focus only on those areas that raise concern about potential systemic risk.”