Industry Wary of New Draft of Systemic Risk Bill

A new draft bill offers a detailed look at what Congress might consider in its effort to control major company failures that could risk the health of the U.S. economy. The draft, released by Rep. Barney Frank, the chairman of the House Financial Services Committee, includes insurers in its wide array of financial companies to be monitored for systemic risk issues.

The bill, also the subject of an Oct. 29 hearing, would make the Federal Reserve Board an oversight entity for systemically risky companies, which could give the Fed wide powers to make rules for those companies in areas such as capital requirements, liquidity and overall risk tolerance. It also establishes an inter-agency Financial Services Oversight Council -- "a strong, inter-agency council to monitor and oversee stability of the financial system and address threats to that stability," as described in the bill summary. It would be populated from all the federal financial agencies, including by one state insurance regulator. That person would be selected by the state commissioners from among their own number but would be a nonvoting member of the council.

The bill does not, however, explicitly define what should be considered a systemically risky business, only providing some broad indicators for measurement, putting them into a category of large, complex financial businesses. Though American International Group Inc. is often cited as an example of this idea, insurers routinely argue that the business of insurance is stable and shouldn't be grouped with riskier sectors.

"Federal regulators will impose heightened standards through a variety of options tailored to the specific threat posed -- there is no 'one size fits all' approach," according to the bill's announcement summary.

It's unclear how, without a federal regulator, the insurance industry would be watched -- though lawmakers have indicated that a potential future federal insurance office may act in that capacity. At this point, among defined lists of "appropriate financial regulators" in the draft bill is "the state insurance authority of the state in which an insurance company is domiciled, with respect to any financial institution engaged in providing insurance under state insurance law."

The bill would lift some of the provisions of the Gramm-Leach-Bliley Act, allowing greater federal authority for regulation of the major financial institutions allowed for under that law.

In response to the release of the legislative draft, insurance groups argued again that they aren't the problem.

"The insurance industry has proven not to be a systemic risk," said Cliston Brown, a spokesman for the Property Casualty Insurers Association of America. "We are financially responsible and stable, we have never asked for a government bailout, and we did not cause the economic crisis. We are not highly leveraged and demonstrably not cyclical with economic downturns."

"Notwithstanding our industry's critical role in the economy, traditional property/casualty companies don't operate like banks or other financial firms," said Blain Rethmeier, spokesman for the American Insurance Association. "Therefore, it is absolutely critical that as lawmakers proceed on any systemic risk or resolution authority legislation, these differences are taken into account."

Rep. Brad Sherman, D-Calif., called the proposed legislation "the most unprecedented transfer of power" in congressional history.

The current 253-page draft legislation would also provide for an approach to "winding down" and resolving failing firms by the Federal Deposit Insurance Corp. Treasury Secretary Tim Geithner described the administration's position on how that should be paid for, testifying at the hearing that taxpayers wouldn't be stuck with the bill but that the cost should be recouped from the financial companies.