Greater Transparency Needed From Fed on Insurance Regulation, Experts Say
July 15, 2015 by Frank Klimko
Congress should impose better transparency on the Federal Reserve, especially as it takes on a larger role in the regulation of insurance companies that, if unchecked, could supplant the current system of state-based insurance regulators, experts testified at a hearing of the House Financial Services Oversight and Investigations subcommittee.
“The Fed is empowered to examine firms that hold one-third of insurance industry assets even though these firms are examined by state insurance regulators,” said Paul Kupiec, resident scholar at the American Enterprise Institute.
“Many in the insurance industry believe that the Fed is using its new Dodd-Frank powers to become the de facto national insurance supervisor,” Kupiec said. “These developments could lead to wholesale revisions in the supervision and capital regulations that apply to state insurers and result in the imposition of bank-style capital regulation on the insurance industry.”
The Fed could impose new insurance industry constraints on dividend payments or other transactions, Kupiec said. The Fed could also apply its holding company capital rules for a holding company comprised of insurance related activities, which includes a subsidiary depository institution that holds only a tiny fraction of the assets, Kupiec said.
“Congress must mandate greater transparency,” Kupiec said.
Mark Calabria, director of financial regulation studies at the Cato Institute, agreed.
“The Federal Reserve played a starring role in both creating the financial crisis and in its response. Despite that role and the Fed’s numerous failings, Dodd-Frank largely expanded its responsibilities,” Calabria said. “Without reform, including greater accountability and transparency, the Federal Reserve is almost certain to continue its pattern. The need for reform is particularly urgent, if not perhaps a little too late.”
Kupiec was also critical of the Financial Stability Oversight Council, which determines which companies could contribute to the next global economic collapse. The companies designated as systemically important financial institutions by the FSOC are subjected to greater supervision by the Fed.
Rep. Sean Duffy, R-Wis., panel chairman, questioned the wisdom of the Fed’s work on new global capital standards. The new capital standards are being developed through the G-20’s Financial Stability Board, of which the Fed is a member. There are no U.S. state insurance regulators on the board or represented at the FSB (Best’s News Service, June 29, 2015).
The FSB has designated nine insurers as Global Systemically Important Insurers, including AIG, Prudential and MetLife, the same three that are on the FSOC’s systemically important financial institutions list. Duffy said the FSOC determinations seemed to favor global interests over domestic priorities.
“These designations are determined by the FSOC on which the Fed chair sits,” Duffy said. “While these new powers alone are a significant increase, the Fed also serves on the FSB. Some market participants have expressed concern that the Fed may be showing deference to international regulatory preferences rather than properly representing American interests.”
“While the Fed’s purview and power continues to grow, opacity reigns supreme within its walls. It is a veritable fraternity where silence is golden, and no one, not even Congress, is allowed to ask questions,” Duffy said.
Duffy encouraged panel members to support his bill, H.R. 2141, the International Insurance Standards Transparency Act. The bill would prevent federal regulators from transferring the assets of state-regulated insurance companies to rescue affiliated, failed non-insurance financial firms without the consent of state insurance regulators, and clarifies that state regulators should have primary authority to resolve a failing insurer.
