Posted on 07 Apr 2011
A provision in a Republican budget plan that could repeal federal authority granted under Dodd-Frank to address institutions that pose a systemic risk to the economy is being reviewed by industry represenatives in Washington.
The plan advanced by House Budget Committee Chairman Paul Ryan, R-Wis., and the subject of markup sessions that began April 6, "would end the regime now enshrined into law that paves the way for future bailouts," according to a prepared summary document. The Dodd-Frank financial reform act contained provisions aimed at reducing the risk of taxpayer funded bailouts by granting federal regulators the authority to pursue the assets of financial entities. However, Ryan's proposal said Dodd-Frank "paves the way for future bailouts" by allowing for the allocation of federal dollars.
The insurance industry has maintained that its companies do not poise a systemic risk, as they are regulated by state governments and follow government controls. Insurers and state regulators fear the industry could be folded in under rules that will be drafted to cover banks and not what makes insurance unique.
"Under Dodd-Frank, a nonbank financial company cannot be regarded as systemically important or be designated for Federal Reserve prudential oversight simply because of its combined asset size. Designation requires consideration of a number of risk-related criteria and detailed knowledge of the insurance business model and the regulatory system, and how it differs from banking and other financial services," American Insurance Association spokesman Blain Rethmeier said in an email.
In January, the Dodd-Frank-created Financial Stability Oversight Council identified six criteria for assessing a nonbank financial entity's systemic importance: size, lack of substitutes for the financial services and products the company provides, interconnectedness with other financial firms, leverage, liquidity risk and maturity mismatch and existing regulatory scrutiny. The draft rule now being deliberated also leaves the council flexibility to "consider any other risk-related factors that the council deems appropriate, whether by regulation or on a case-by-case basis.