The US Federal Reserve has made a tentative step toward imposing tougher capital requirements on insurers, inviting comment on a proposal for a two-tier regime designed to shield the financial system from another Lehman-like shock.

Under the proposal, endorsed by the Fed’s board on Friday afternoon, American International Group and Prudential Financial, the huge insurance conglomerate, would face more stringent rules, while the dozen insurance firms under supervision by the Fed due to their banking activities – the likes of State Farm Mutual Automobile Insurance and Nationwide Mutual Insurance – would be subject to lighter capital requirements linked to existing state-based standards, writes Ben McLannahan in New York.

WASHINGTON—Big U.S. insurers Prudential Financial Inc. and American International Group Inc. would face tougher capital requirements than their peers under new rules outlined for the first time Friday by the Federal Reserve’s point-man on regulation.

Fed governor Daniel Tarullo said the Fed will propose rules “in the coming weeks” that will have higher compliance costs for insurers considered “systemically important” to the U.S. financial system.

That group currently includes AIG and Prudential, but not MetLife Inc., which won a court case overturning its systemic label earlier this year. The government has appealed MetLife’s win.

The Fed gained authority for the first time to regulate insurance companies under the 2010 Dodd Frank law, but has taken more than five years to propose rules for the industry. Mr. Tarullo’s remarks Friday were the central banks most detailed description to date of the pending regulations.

Mr. Tarullo didn’t give all the details of the Fed rules, but he sketched them out in a speech to the National Association of Insurance Commissioners, a group of state regulators. He said the Fed will propose different rules for systemic insurers than for other insurance companies it regulates.
The central bank also regulates a dozen U.S. insurance companies that own banks, including Nationwide Mutual Insurance Co. and State Farm Mutual Automobile Insurance Co.

(Corrects Representative Garrett’s first name to Scott in paragraph 6, clarifies in paragraph 3 that Lew testified earlier this year and not Lew and Yellen)

Dec 8 Republican lawmakers on Tuesday lashed out at a major council of U.S. regulators charged with responding to threats to the financial system, saying the Financial Stability Oversight Council is secretive and unwilling to share information.

Financial Services Committee Chairman Jeb Hensarling, of Texas, depicted the council, which includes the heads of the Securities and Exchange Commission and Federal Deposit Insurance Commission, as “powerful government administrators, secretive government meetings, arbitrary rules, and unchecked power to punish or reward.”

This was the first time that as many as eight of the 10 voting members of the council testified before the House of Representatives committee. Federal Reserve Chair Janet Yellen was absent along with Treasury Secretary Jack Lew, who testified earlier this year.

Council members told the hearing they could not share much of the information used to monitor banks and financial companies because it is considered “non-public” or confidential.

Wisconsin Republican Sean Duffy pressed the council, created by the 2010 Dodd-Frank financial reform law, for analysis, memos and correspondence that led it to designate MetLife Inc, General Electric Co and American International Group as systemically important financial institutions, known as “too big to fail.”

“You need to become more like us – more transparent, more open to the American public,” New Jersey Republican Scott Garrett said.

MetLife has sued the council for designating it a “non-bank systemically important financial institution” last year, requiring it to hold more capital.

Last year, the non-partisan Government Accountability Office said the council needed to shed more light on its process to determine if a company is systemically important. (Reporting by Lisa Lambert; Editing by Richard Chang)
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The average American couldn’t pick the Financial Stability Board (FSB) out of a lineup. But every fall this shadowy group of international regulators makes decisions that have a crucial impact on their lives. This year’s announcement on November 3rd added Aegon, the Dutch financial conglomerate and parent of U.S. insurer Transamerica, to the list of too big to fail financial companies. Formally, Aegon joins eight other insurance companies on the FSB’s list of Global Systemically Important Insurers (G-SIIs).

Being named a G-SII launches a company into an entirely new realm of capital requirements, liquidity requirements, and other features of the regulatory web. This makes operations more costly, and products more expensive. Given that, you would think it would be clear who is, and who is not, a G-SII and why. But it has never been clear why the FSB and its U.S. arm, the Financial Stability Oversight Council (FSOC), make the decisions they do.

For example, the nine G-SIIs are all primary insurers. However, there are comparably large, global reinsurers like Berkshire Hathaway who are not designated (at least yet) as G-SIIs. What’s the difference? Insurers sell insurance to primary customers. Reinsurers sell insurance to insurance companies. The U.S. Federal Insurance Office asserts that the business of insurance and reinsurance are so tightly intertwined that one could not exist without the other.

If the FSB and the FSOC were basing their decisions on the risks posed by the products and activities one would seemingly be led to the inevitable conclusion that either both are G-SIIs or both are not. The evidence supports the latter – insurance companies are not like too big to fail banks – but the inconsistency is troubling in either event. The FSB and FSOC have to get the analysis right and apply it consistently.

A lot is at stake. International regulators are struggling to justify their G-SII regime, but have no hesitation about proposing to make designated companies hold more capital. As a result, G-SIIs will need to raise prices or dial back the guarantees they offer to consumers, without any assurance that the financial system will be safer. The FSB does not have to justify its decisions because the process is carried out behind closed doors.

Similar concerns have been raised in the United States. The FSOC has come under criticism for designating insurance companies as Systemically Important Financial Institutions (SIFIs). Unfortunately, it is hard to make this case on the merits and the regulatory regime is being designed by banking regulators that do not understand the insurance business. Prudential, MetLife, and AIG appear to simply be big and for this transgression have been thrown into an ill-fitting, expensive regulatory morass.

In contrast, the FSOC stopped short of doing the same thing with comparably large asset managers. Instead, it requested an analysis of the risks posed by asset manager’ activities and products. That is good, but its refusal to have the same treatment of insurers cries out for explanation. Good luck getting an answer from FSOC, whose designation process is every bit as opaque as the FSB’s.

In the wake of the financial crisis, regulators have said their highest priority is to make sure that no “too big to fail” institution ever gets a taxpayer bailout. To do so requires that the regulatory process be transparent and founded on genuine, principled risk analysis. If it is not, it will provide fodder for suspicions of political influence and undercut the goal of building greater trust in the financial system.

Why should an insurance company be treated like a bank? One day while sitting on the roof of his doghouse, Snoopy supposedly penned a letter to our nation’s tax collectors that read, “Dear IRS: Please take me off your mailing list!” (The story’s provenance is a matter of debate, but it’s become a part of Snoopy lore.) Now, however, an arbitrary action by an unaccountable government entity may prompt MetLife’s longtime “spokesdog” to revise his apocryphal letter: “Dear FSOC: Please take MetLife off your too-big-to fail list.” The Financial Stability Oversight Council (FSOC) is a secretive, unaccountable task force of financial bureaucrats of various agencies that was created by the Dodd-Frank “financial reform” bill that was rammed through a Democrat-controlled Congress in 2010. A few weeks ago, FSOC designated MetLife as a “systemically important financial institution” (SIFI). This means the federal government considers MetLife to be “too big to fail,” making it subject to the same Dodd-Frank bailout regime set up for big Wall Street banks like Goldman Sachs and JPMorgan Chase. As my organization, the Competitive Enterprise Institute (CEI), argues in a legal challenge to the Dodd-Frank Act (including the FSOC’s role of identifying risk), the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail. That’s why big banks and MetLife competitor American International Group (AIG), which have already received billions in taxpayer bailouts, have eagerly embraced their SIFI status. But MetLife, to its credit, has publicly stated that it is not too big to fail and does not want the special privileges that come with SIFI status. MetLife chairman and CEO Steven A. Kandarian declared last year, “I do not believe that MetLife is a systemically important financial institution.” The insurance company, in fact, recently informed its shareholders that it may even sue the Obama administration to escape the “systemically important” designation that some competitors covet. Unlike AIG and the big banks, MetLife has never taken a dime in taxpayer bailouts. It is asking not for a handout, but for the federal government to keep its hands off of the successful business model it has used to serve customers for over a century. To use another “Peanuts” analogy, the FSOC’s designating MetLife a SIFI is like a bully’s taking Charlie Brown’s lunch money to subsidize Pigpen’s rolling in the dirt, because under Dodd-Frank, when one SIFI fails, all the other SIFIs pay its bailout costs. As my colleague Iain Murray explains: ADVERTISING [T]here are two classes of SIFIs — 1) the high-rolling institutions that may be tempted to take unreasonable risks with the money people have entrusted to them, and 2) the large stable firms that actually have the money (again, entrusted to them by clients) that can be expropriated by government to pay for the mistakes of the first class. Given the fact that the FSOC did not publicly acknowledge its action or give any reason for it — news of the SIFI designation came from MetLife itself — it’s reasonable to conclude that the conservatively managed MetLife is in the second category. For MetLife customers, this will mean higher premiums and fewer services. And that’s not the worst part. As  I have written previously on NRO, under the Federal Reserve’s interpretation of  Dodd-Frank’s Collins amendment, sponsored by liberal Republican senator Susan Collins (Me.), insurance companies with a small thrift operation — or even those, like MetLife,  without any banking component but deemed “systemically important” by the FSOC — will face the same capital standards that banks do. This is a practice that strikes even an arch-liberal lawmaker such as Senator Sherrod Brown (D., Ohio) as absurd. “I want strong capital standards, but they have to make sense,” Brown said recently. “Applying bank standards to insurers could make the financial system riskier, not safer.” Imposing bank-capital standards on insurers would raise costs for life-insurance consumers by $5 billion to $8 billion, according to the economic consulting firm Oliver Wyman. These costs could hit policyholders through both higher premiums and reduced benefits. And some policies simply could become unavailable as insurers “exit certain product lines,” the Oliver Wyman study found. Among the product lines that could disappear or become prohibitively expensive are variable annuities, an increasingly popular retirement option. MetLife CEO Kandarian remarked last year, “It is hard for me to see how life insurers living under [bank-centric rules] could remain in the variable-annuity business.” And, perversely, such bank-like standards would probably heighten risks for insurers, according to risk-management professionals. In a June 5 letter to Congress, the American Academy of Actuaries warns that forcing insurers to follow bank-capital rules “assigns risks to insurers that are not necessarily significant to them” and “understates risks that may be more significant to insurers than to entities such as banks.” Federal Reserve chairman Janet Yellen doesn’t seem to disagree with these assessments, but says the language of Dodd-Frank’s Collins amendment ties the Fed’s hands. “The Collins amendment does restrict what is possible for the Federal Reserve in designing an appropriate set of rules,” Yellen said at a Senate hearing. For her part, Collins, one of three Senate Republicans to vote for Dodd-Frank, says her provision has been misinterpreted. “Since I am the author of the Collins amendment, since I am Senator Collins, I think I know what I meant,” she stated at a Senate hearing in March Yet there has been complete silence on this from Obama and his Treasury Department.  Perhaps they are nodding their heads with this font of economic wisdom from Paul Krugman’s fawning Rolling Stone piece on the achievements of the administration. Krugman’s circular reasoning is that designating MetLife as a SIFI must be good because “MetLife is making an all-out effort to be kept off the SIFI list.” Therefore, Krugman explains,“this effort demonstrates that we’re talking about real regulation here, and that financial interests don’t like it.” Fortunately, a piece of legislation is hovering around the Capitol that, like Snoopy the flying ace, could partially save the day. The Insurance Capital Standards Clarification Act of 2014 (S. 2270), which the Senate passed unanimously on June 3, would revise Dodd-Frank by clarifying that it was not Congress’s intent to apply bank-capital rules to insurers. Now all the House has to do in the lame-duck session is pass an identical companion measure, the bipartisan H.R. 4510, and send it to President Obama’s desk. Obama will have the choice to either sign the bill or face veto-proof majorities in both houses. As I have written before, forcing Obama’s hand here will rightfully “erode much of what little luster there is from Dodd-Frank” and make it politically easier to repeal the law, or at the very least grant relief from other harmful parts of it. But the main reason to pass this bill is to prevent the not-so-good grief among the insured that will occur if the FSOC is left unchecked. We have already seen what happened when the football was pulled away in the health-insurance market thanks to Obamacare. — John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.

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Treasury Secretary Jack Lew has either botched his effort to designate MetLife too big to fail, or else he has made the best argument yet for repeal of the 2010 Dodd-Frank financial law. Maybe both.

Four national groups have filed Amici Curiae briefs supporting MetLife‘s lawsuit against the Financial Stability Oversight Council (FSOC) to remove the nonbank systemically important financial institution (SIFI) designation, more commonly known as “too big to fail,” according to media reports.

The National Association of Insurance Commissioners (NAIC), the American Council of Life Insurers (ACLI), the Academic Experts in Financial Regulation (AEFR), and the U.S. Chamber of Commerce all filed briefs backing the New York-based global insurance provider’s attempt to remove the SIFI tag.

NAIC’s main argument in support of MetLife was that the FSOC designated the insurance provider as too big to fail based on its large size alone instead of conducting an analysis to determine if supervision from the Federal Reserve would do more to mitigate the “alleged threat” MetLife poses to U.S. financial stability than existing state regulations. ALCI argued that the FSOC used a bank-centric model to designate MetLife as SIFI and ignored insurance regulations. AEFR’s arguments in favor of MetLife were similar to the NAIC’s and ALCI’s briefs, but AEFR argued that the FSOC should have performed a cost-benefit analysis. The Chamber of Commerce, meanwhile questioned in its brief whether or not MetLife is susceptible to material financial distress, as mandated by Section 113 of Dodd-Frank.

The FSOC notified MetLife in December 2014 that it had received the nonbank SIFI designation. MetLife countered by suing the FSOC in the U.S. District Court for the District of Columbia in January to have the SIFI designation removed. MetLife is trying to have the designation removed because as a nonbank SIFI, it is subject to heightened regulation which the company says will increase compliance costs, hence increasing costs to consumers without any added safety benefit for the financial system.

“The company continues to believe that MetLife is not systemically important under the Dodd-Frank Act’s criteria and has asked the U.S. District Court for the District of Columbia to review the decision,” MetLife wrote on its website.

In mid-May, the U.S. Department of Justice made a non-public motion to have MetLife’s suit against the FSOC dismissed. MetLife filed a motion for summary judgment with the U.S. District Court in the District of Columbia on June 16. Earlier this week, MetLife asked the court to force the FSOC to produce hundreds of pages of documents related to the December decision to designate MetLife as a nonbank SIFI.

MetLife has set up a portion of its website devoted to providing a “central point for information related to the judicial review of FSOC’s designation.” Other nonbanks to receive the SIFI designation were American International Group (AIG), Prudential Financial, and General Electric. MetLife is the first institution to challenge the SIFI designation.

MetLife sued a panel of regulators led by the Treasury secretary on Tuesday to fight its designation as “systemically important,” making it the first financial company to go to court over the issue since the government started singling out so-called too-big-to-fail institutions in an effort to stem any future financial crises.

The regulatory panel, known as the Financial Stability Oversight Council, has been deciding which companies qualify as systemically important, an authority given it under the Dodd-Frank financial overhaul law. The goal is to prevent the kind of domino effect that swept the financial system in 2008, when the troubles of a few important companies threatened to topple countless others unless taxpayers provided a giant bailout.