The Financial Stability Oversight Council (FSOC) missed an opportunity to identify any risky or unwanted activities that could have helped stability efforts of insurance regulators both domestically and internationally, according to Roy Woodall, the independent insurance expert with the FSOC.
Woodall spoke critically of the FSOC approach to its review of insurance companies as systemically risky before a committee of the National Association of Insurance Commissioners (NAIC) dealing with financial stability matters Sunday here in Washington, along with his fellow FSOC non-voting member, Missouri Insurance Director John Huff.
This is not the first time Huff and Woodall have been critical. Woodall’s comments were not dissimilar to his dissent in the 9-to-2 systemically important financial institution (SIFI) vote of Prudential Financial, the second-largest U.S. life insurer with more than $1 trillion in assets under management, although they clearly pointed to another path the FSOC could have taken. Huff has stood before state regulators before and said that some of his fellow regulators may not understand insurance.
Woodall said that the FSOC’s underlying assumptions were misguided because they focused on material distress when members could have — and should have — focused on the alternate option under the Dodd-Frank Act. There are two equivalent options in the statute, and FSOC only needs to satisfy one.
There is traditional versus nontraditional, core versus noncore and insurance versus shadow banking, for example, and these are the crux of what state and international regulators scrutinize anyway, according to Woodall.
Instead, the FSOC’s decision to pursue SIFI designations of insurance companies through the material distress approach “provides no direction, clarity or transparency to the public or to state insurance regulators, international supervisors, the companies themselves — or even FSOC members as to what activities need to be addressed or modified,” Woodall said.
FSOC is now looking at asset managers like BlackRock Inc. and Fidelity Investments as potential SIFIs.
Woodall also said he is concerned about the Collins Amendment’s (part of the Dodd-Frank Act) potential impact on consumers, even though SIFIs to which they will apply are designated with the perspective of protection of the whole financial system. Woodall says these needn’t be mutually exclusive and although the Federal Reserve Board realizes that the bank capital rules don’t fit, it feels constrained by this statute.
Huff, who preceded Woodall in his remarks at the NAIC late afternoon meeting, said the FSOC’s rationale as he has seen it apply to Prudential is of “real concern.”
Huff is also concerned about the balance of the FSOC, where “in any given non-banks decision, at least three of the seven votes required for designation are banking regulators that have little or no skin in the game.”
There are 10 FSOC voting members, including Woodall. There are two nonvoting insurance members. Each vote is weighted equally according to statute. Some say there is more insurance expertise on the FSOC than any other industry, save for banking.
“Banking regulators should not be making designation decisions that could have impacts on firms and markets in which they have no experience or authority overseeing, like insurance,” Huff stated.
Huff proposed one potential fix to the FSOC’s structural problems — namely that the other regulators around the table should defer to those who have the appropriate regulatory experience in a given sector.
Otherwise, the FSOC could end up going in the wrong direction, Huff said. These structural flaws have led to the Council’s basis for the designation of Prudential, he added.