WASHINGTON–Insurance and investment management companies want an “off-ramp” for companies deemed systemically important financial institutions, a designation that subjects them to tougher scrutiny, top executives told a Senate Committee on Banking, Housing and Urban Affairs hearing Wednesday.
The Financial Stability Oversight Council, with the guidance of the international regulatory group Financial Stability Board, designates any firm whose failure could cause another financial crisis to be a systemically important financial institution, or SIFI. Life insurance giants Prudential Financial, and MetLife made it to the list despite their protestations.
The SIFI designation, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, means more oversight, such as the promise of higher capital requirements and stress testing by financial regulators.
Dirk Kempthorne, president and CEO of the American Council of Life Insurers, a Washington-based lobbying group, proposed the “off-ramp” option for the SIFI designation process, telling the committee that clarification is needed on the criteria for designation as well as options for those risky companies to reverse the designation by changing their inappropriate operations.
Kempthorne, whose organization represents more than 90% of assets in the life insurance industry, recommended replacing the designation process for insurers with “activities-based” regulation in order to avoid the negative consequences of designating individual companies merely because of size.
“We must have great transparency and greater communication,” Kempthorne said when responding to a question by Sen. Elizabeth Warren, the Massachusetts Democrat, “and before a designation, why not identify what is the risk, and then the company may determine whether it could take its own actions to remove the risks, and then change its operations, or it could ask the primary regulators, would you please deal with these issues?”
Paul Stevens, president and CEO of the Investment Company Institute, raised concerns about the methodology for designating a mutual fund company to be systemically risky.
“The methodology basically is based solely on size,” Stevens said. “What the FSB is proposing is, if you are a mutual fund with a $100 million in asset under management, you would be automatically within the materiality threshold recommended for consideration.”
Under that methodology, Stevens said, mutual fund companies would simply split their original fund into smaller funds.
“Maybe that makes it less risky, but I think it says that the original materiality threshold is nonsensical,” Stevens said.
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