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Insurers Get 180 Days of SIFI Designation Relief

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The Trump administration today gave life insurers two big, but temporary, victories against the Dodd-Frank Act.

President Donald Trump sent Treasury Secretary Steven Mnuchin two memos about the act.

(Related: Trump Issues Dodd-Frank Executive Order)

One memo calls for Mnuchin to spend 180 days reviewing the Financial Stability Oversight Council process for deciding whether an insurance company or other nonbank financial company is a “systemically important financial institution,” or an organization so critical that serious problems with it could hurt the U.S. economy. The memo includes an order for Mnuchin to determine whether the SIFI designation is transparent enough and gives insurers and other entities meaningful access to a timely, transparent appeals process.

Trump told Mnuchin and FSOC not to name any new SIFIs while the review of the designation process is under way.

The other memo calls for Mnuchin to spend 180 days looking at the Orderly Liquidation Authority and the Orderly Liquidation Fund. The OLA is the mechanism the government is supposed to use to resolve serious problems at SIFIs. The Orderly Liquidation Fund is the fund the U.S. Treasury Department is supposed to use to pay for an orderly liquidation of a SIFI.

Trump told Mnuchin to use the OLA mechanism only in a significant emergency, and only after consulting with the White House.

Trump also announced an executive order calling for Mnuchin and the Treasury Department to review all significant tax regulations issued since the beginning of 2016, in an effort to identify and reduce tax regulatory burdens.

Dirk Kempthorne, president of the American Council of Life Insurers, put out a statement welcoming the two new memos to Mnuchin.

“This is a move in the right designation, as the current designation of financial institutions as systemically important is fatally flawed,” Kempthorne said in the statement. “We believe the end-result of this review should be for the Treasury Department to recommend the rescission of the authority of the Financial Stability Oversight Council to designate life insurers as systemically important.”

The SIFI designation process has had a direct effect on many agents and brokers in the life and annuity markets, by pushing MetLife Inc. to spin off its life and annuity business as a separate entity, Brighthouse Financial.

Capitol (Photo: Thinkstock)

Capitol (Photo: Thinkstock)

Congress passed the Dodd-Frank Act in 2010, in response to the financial crisis that started in 2007. Drafters included the SIFI designation system, the mechanism for liquidating troubled SIFIs, and the SIFI liquidation fund in the act in an effort to keep the collapse of any large financial services company from causing a similar financial crisis in the future.

Mnuchin said at a press conference that the Trump administration has met with about 800 people in meetings on the effects of the Dodd-Frank Act and other aspects of financial reform.

The Dodd-Frank memos “fulfill his campaign promise to make sure that Dodd-Frank is not harming our financial system,” Mnuchin said.

The SIFI System

The financial crisis that led to the passage of Dodd-Frank started to form in 2007, when the number of consumers who were behind on their mortgage payments increased sharply. Deteriorating mortgage payment rates hurt the securities backed by the securities. In 2008, the problems in the mortgage-backed securities market hammered American International Group Inc. and other companies that had acted as the counterparties for the credit default swaps tied to the troubled mortgage-backed securities.

The counterparties had taken the position that the mortgage-backed securities tied to the swaps would be reasonably stable. When the securities performed poorly, the credit default swaps imploded. The imploding swaps exposed AIG and the other counterparties to big, escalating demands for cash. Eventually, the demands for cash became big enough to threaten the counterparties with insolvency.

The builders and defenders of the SIFI system say regulators need strong, flexible authority to designate SIFIs, and put struggling SIFIs under supervision, to deal with unpredictable financial crises.

The SIFI system defenders say the fact that AIG, an insurance company, was at the center of the 2008 crisis shows that financial regulators need the ability to respond to severe problems at entities other than banks.

Opponents, including the American Council of Life Insurers, life insurers and state insurance regulators, say the designation process is opaque, punishes successful insurers, and reflects a lack of federal government understanding of the difference between how banks work and how life insurance companies work.

Opponents of the SIFI system argue that AIG got into trouble by participating in the credit default swaps market, not because of problems with its insurance operations.

Life insurance operations are closely monitored by state insurance regulators, and, even when a life insurer fails, the structure of life insurance product contracts will prevent the kind of “run on the insurer” that could hurt the rest of the financial system, SIFI system opponents argue.

The OLA Mechanism

The OLA system is supposed to give the Treasury secretary the ability to impose assessments on financial services companies to pay to stabilize and unwind dangerously troubled SIFIs. In the OLA review memo, Trump cites arguments that the liquidation fund system could still expose taxpayers to big bailout bills, and that the existence of a bailout fund mechanism might have the perverse effect of encouraging SIFIs to assume extra risk.

— Read Life Group Blasts ‘Too Big to Fail’ Selection Process on ThinkAdvisor.


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