A senior Republican member of the House Financial Services Committee plans to introduce legislation next week that would bar federal regulators from designating insurance companies as systemically significant.
Rep. Scott Garrett, R-N.J., disclosed his plans in comments at the House FSC hearing where Treasury Secretary Timothy Geithner reported to the committee on the first year’s operations of the Financial Stability Oversight Council.
In questioning Geithner at the hearing, Garrett questioned “the reasoning behind spreading the Too-Big-To-Fail doctrine to other parts of our financial system.”
He asked Geithner, “Why is it a good idea for FSOC to designate other firms in other parts of the financial sector as Too-Big-To-Fail as you plan to do in the near future?”
He then asked Geithner, “Why do we want to harden the minds of the marketplace into believing asset management firms, insurance companies and finance companies are Too-Big-To-Fail?
“Why do we want to spread the problems from the banking sector to these new businesses where they will receive cheaper funding in the marketplace and be able to swallow up their less competitive counterparts?” he asked Geithner.
“I believe we should not be doing this,” he told Geithner. “I believe the FSOC should not designate any nonbanks as Too-Big-To-Fail and I plan on introducing legislation next week to remove that authority.”
At an earlier hearing, Garrett called the entire SIFI debate a “charade” and suggested that discussions should center on how to end too big to fail and the moral hazard it poses.
The FSOC, created by the Dodd-Frank Act, is charged with identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system.
Insurers have vehemently opposed designation as so-called “SIFIs.” They said the FSOC wants to use bank-centric metrics to identify non-banks as potentially systemically significant, and that, unlike banks, insurers pose no risks to the financial system.
For example, MetLife is in the process of selling its bank to GE Capital out of concern that keeping the bank will make it more likely that it will be designated a SIFI and therefore subject to both state and federal regulation.
“At this time we do not have any language available nor do we have any information regarding cosponsors,” said a spokesman for Garrett. More information will be forthcoming next week, he said.
The American Enterprise Institute, the conservative think tank, has taken a dim view of the SIFI designation, as have some Republican lawmakers.
If, as expected, the FSOC goes forward with its SIFI designations this year, "the entire financial services industry will be set on a course toward domination by a few large firms that have been chosen for special government attention," wrote Peter Wallison, AEI fellow in financial policy studies in April.
"If the Fed declares, for example, that finance companies must hold more capital, it will raise the costs of these firms in their competition with banks,” Wallison warned. “If the Fed waves its wand and decides that insurers must increase their liquidity, it will change their investment performance in comparison with mutual funds or pension funds."
Garrett is the second most powerful member of the House FSC, serving as chairman of its key Capital Markets Subcommittee.
The legislation is likely to run into strong opposition. The insurance industry vehemently opposes a SIFI designation, but does want the Federal Insurance Office, also created by DFA, to help its members negotiate trade agreements with foreign countries on favorable terms.
The industry also opposes having to provide financial information to another agency within Treasury created by DFA, the Office of Financial Research.
However, in a report released last Friday, the OFR argued that the insurance industry is “an important locus of contingent exposure,” and cited gaps in the financial data currently compiled by the industry, as well as the National Association of Insurance Commissioners.
The report said there is a dire need to gather even more data, either from the NAIC or from the companies themselves. It has the authority to ask for that data.
In general, “These [data] gaps underscore once again the need for a more comprehensive picture of the financial system,” the OFR report said.
“The failure of supervisors to foresee the 2007–2009 crisis, despite an elaborate combination of aggregate analysis, regular examinations, and continuous monitoring at the largest commercial and investment banks, illustrates the need for further investment and research to improve the information sources that they have available to monitor financial stability,” the report concluded.