The FSB and Basel committee are seeking tougher rules for too-big-to-fail organizations to prevent a repeat of the turmoil that followed the collapse of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc. Insurers argue it would be a mistake to classify them in the same way as banks.
“Systemic relevance does not depend on an insurer’s size, but on the nature of the business,” Allianz SE Chief Financial Officer Oliver Baete said in a conference call yesterday. “Defining systemic relevance by size is wrong. I would always be watching for weak business models as those could become systemically relevant faster than we all can imagine.”
The FSB is working on criteria to identify institutions that are systemically important at a global level, the FSB said in an e-mailed statement. It declined to comment on whether insurers or clearing houses would be included.
Provisional Criteria
The FSB will complete work on the criteria by the end of 2011, Mario Draghi, the group’s chairman, said last month. The Basel committee said in a statement last month that it will develop provisional criteria for “assessing the systemic importance of financial institutions” by the end of 2010.
Leaders from the Group of 20 nations meeting today and tomorrow in Seoul will review FSB and Basel proposals that systemically important institutions should be subject to tougher requirements. They may also endorse reforms to bank capital rules reached by global regulators in September.
“We firmly believe that insurers, if they keep to their core business, are not systemically relevant as banks are, and we are very confident that politicians will clearly see that difference,” Joerg Schneider, chief financial officer at Munich Re, the world’s biggest reinsurer, said in a conference call Nov. 9. “We regard ourselves as not systemically relevant and we are quite convinced that this is economically sound.”
Greater Capacity
Systemically important institutions should be required to have greater capacity to absorb losses than other financial companies, the FSB said in a statement last month. They should also be subject to “supplementary prudential and other requirements.”
Bart Nash, a spokesman for Lloyd’s of London, the world’s biggest insurance market, said in an e-mail “there is growing acknowledgement” among regulators “that the insurers are different to banks and core insurance operations do not create systemic risk.”
“Updated standards” are needed to make “core market infrastructures” such as clearing houses more “robust,” the FSB said in its statement last month.
Clearing houses, such as LCH Clearnet Ltd., operate as central counterparties for every buy and sell order executed by their members, who post collateral, reducing the risk that a trader defaults on a deal.
The U.S. and 27-nation European Union have proposed measures to push more derivatives trading through clearinghouses, to reduce the risk that such trading poses to financial stability.
The FSB was set up by the G-20 last year to oversee the work of groups setting international standards. It replaced the Financial Stability Forum, an advisory group with no formal role that was created in 1999 after the Asian financial crisis.