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Financial Stability Council Eyes Nonbanks' Access to Cash

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What You Need to Know

  • The Financial Stability Oversight Council coordinates U.S. efforts to maintain financial system stability.
  • The nonbanks getting attention now are mutual funds, not insurers.
  • Discussion at the first Biden-era public meeting focused mainly on climate change.

Top U.S financial services regulators are worried about mutual funds and hedge funds, and that could create regulatory headaches for life insurers.

Members of the Financial Stability Oversight Council, the body responsible for keeping the U.S. financial system upright, talked about nonbank risk Wednesday, at the first FSOC meeting held since Joe Biden became president.

Treasury Secretary Janet Yellen — FSOC’s chairperson — said  in her opening remarks at the meeting, which was held online, that she has concerns about what happens when open-ended money market mutual funds promise investors quicker access to their cash than the underlying assets offer.

The U.S. Securities and Exchange Commission already has been studying how money market funds performed in March 2020, when news of the U.S. COVID-19 lockdowns hit, Yellen said.

“As a next step, I have asked for an interagency assessment to determine if additional measures should be taken to address this financial stability vulnerability, and, if so, to develop recommendations for the council,” Yellen said.

Yellen serves on FSOC alongside the heads of all federal financial services regulatory agencies, such as the Federal Reserve Board and the National Credit Union Administration.

The list of FSOC members also includes three members with an interest in insurance: Thomas Workman, who serves as the council’s “independent member with insurance expertise”; Steven Seitz, director of the Federal Insurance Office; and Eric Cioppa, superintendent of the Maine Bureau of Insurance, who represents state insurance regulators.

Workman is a voting FSOC member. Seitz and Cioppa are non-voting members.

Life Insurers and FSOC

Yellen did not mention life insurers, but Gregg Gelznis, associate director at the Center for American Progress, a think tank with strong ties to the Biden administration, wrote in a commentary posted Wednesday that FSOC should change the process it now uses to designate nonbanks as systemically important.

Congress created FSOC with a provision in the Dodd-Frank Act, a law that was adopted during the administration of former President Barack Obama, in response to the financial system problems that occurred before and during the 2007-2009 Great Recession.

FSOC provision drafters were worried that federal regulators had trouble seeing what was going on partly because they had focused mainly on regulating the banking and securities industries and had little role in overseeing some other types of financial institutions, such as life insurers.

One section of the FSOC provision gave FSOC the ability to impose extra requirements and regulatory scrutiny on a nonbank company by designating it as a “systemically important financial institution,” or SIFI.

FSOC designated AIG, MetLife, Prudential and GE Capital as systemically important. The companies designated in that way argued that the designation process was difficult to understand, and that operating as a designated company was complicated and expensive.

In 2019, during the administration of former President Donald, Trump, FSOC adopted a batch of guidance that created a more open, more complicated process for classifying nonbanks as systemically important.

Gelznis says, in a commentary posted on the Center for American Progress website, that the 2019 guidance hurt FSOC’s ability to designate nonbanks as systemically important.

“The Biden administration should swiftly repeal the hurdles the Trump administration put in place, and the FSOC should once again use this tool to promote a more stable financial system,” Gelznis writes.

Old Fires Could Flare

Life insurers spent years working to persuade FSOC to adopt the 2019 guidance.

Any sign that the FSOC might revive the pre-2019 rules could lead to extensive new lobbying efforts.

Signs that the pre-2019 rules could return could also affect some companies’ interest in selling life insurance, annuities and other products that may involve extensive use of bonds, derivatives and other financial instruments.

When MetLife Inc. put its individual life and annuity operations into Brighthouse Financial Inc. and turned Brighthouse into a separate company, one motive was concern about the possibility that being classified as a systemically important financial institution could lead to higher capital requirements for the individual life and annuity operations.

Treasury Secretary Janet Yellen. (Photo: Bloomberg)