Lew “comfortable” with Prudential’s SIFI designation, FSOC process & FSOC’s work

Well, the Financial Stability Oversight Council’s (FSOC) hearing over its 2014 annual report is over and done with. Treasury Secretary Jack Lew testified that FSOC has an important, unprecedented job to do, it is doing that job with rigor and transparency, agencies are no longer “siloed,”and that Dodd Frank Act  and its FSOC really shouldn’t be meddled with — except perhaps for technical reasons.

During the June 24 hearing, lawmakers on the House Financial Services Committee pointed out “push back” from the primary regulators on the Council, such as from the independent insurance expert Roy Woodall and from the Securities and Exchange Commission (SEC), on some of the reviews of their sectors’ companies and products.

The lawmakers complained about lack of transparency, the possible avoidance of systemically risky financial institution (SIFI) designations, international capital standards, insurance accounting principles, and how a financial company might be trapped in the label with no way out once it got its SIFI designation, the suggestion that it was not the insurance portion or the state insurance regulators that were at fault with the AIG financial meltdown in a credit default swaps blaze and a variety of problems perceived by their constituents and others with regard to the FSOC process.

After all, the Committee passed two bills last week that put the FSOC on a shorter leash, one a moratorium on SIFI designations for six months and  the other opening up FSOC to the Sunshine Act and the meetings to select members of Congress and federal agency board members.

“I believe the review of the record was a robust one and it warranted the decision,” Lew stated in a reference to Prudential Financial’s SIFI designation last year, after a hearing.  The  decision stands and the company has not appealed it through the courts as it could have, Lew noted. The bar for winning such a court appeal is high, though, the industry has noted.

The FSOC process with Prudential was one that “reflected rigor and analytic quality and I am both comfortable with and concur with the judgment that was made,” Lew said.

Designation is “a big deal” and there is not an opportunity  at all for the potential designee to directly address the final information charges that are used to justify the decision before full FSOC or have the FSOC justify the charges that made their decision, charged  Rep. Gwendolynne  “Gwen” Moore, D-Wis.

Lew said this  was not correct. “There is extensive back and forth between a company and the FSOC ” in the stage three process, Lew said.

Other Committee members  wanted to know what a company could do to fend off stage 3 review, perhaps ditching some of its risky business beforehand, so to speak. Lew said full disclosure before stage 2 might not make sense for the company because it would have to report to financial markets and might affect the company before a decision had been made.

There is a company in Stage 2 now that is an insurer or has large insurance elements, based on a review of the FSOC meeting minutes, which is believed to be Berkshire Hathaway. Bloomberg first reported Berkshire Hathaway may be under FSOC scrutiny in January.

Berkshire Hathaway  sort of passes the criteria for stage 1 of a SIFI if one looks at size. But insurance, although core, is mixed with massive  investments and holdings, including now a major interest in RJ Heinz and  is not 85% of the holding company.  A SIFI must be “predominantly engaged” in financial activities, a US nonbank SIFI “must derive 85% or more of its consolidated annual gross revenues from financial activities or have 85% or more of its consolidated assets related to activities that are financial in nature.”

Of 2013 sated balance sheet revenues, about $36.7 billion were insurance premiums earned, about  $94.8 billion were  in sales ad service revenues, about  $34.8 billion were in  revenues from railroad, utilities and energy businesses, and almost  $16 billion in interest, dividend, investment income, revenue of financial and financial products and derivative gains, all totaled.

Whether it is systemically risky from a reinsurance perspective, even as it appears to be  in stage 2 FSOC analysis, is another question. Warren Buffett wrote in the 2012 annual report AND the 2013 annual report that “if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because it has so many streams of earnings.”

Indeed, “All other major insurers and reinsurers would meanwhile be far in the red, with some facing insolvency,” Buffet wrote.

Lew  also said once the SIFI designation is made, companies get reviewed once a year. The FSOC chair, said sometimes it will be a product and not a firm that is an issue, and urged lawmakers to let “the process run its course,” and not put FSOC in a place where “you are afraid to ask the question” about whether some company or product is indeed systemically risky.

There are many instances [under review] where there is not a risk and where FSOC does not need to take action, Lew stated. One lawmaker made it seem as if there was a “gotcha” situation with the SIFI designation. He pushed for something called “self-correctness,” something a company can do before it reaches stage 3.

“What?” asked Lew, calling FSOC’s review process of companies very transparent.

As for international accounting and/or capital standards, Lew acknowledged it might be difficult to go about creating them but it was a good thing to “eliminate some of the noise between different systems.”

Lew also told lawmakers that  the goal of going in and amending Dodd -Frank Act was not a good idea on a broader basis,  unless it involved a technical fix (perhaps the reworking Collins Amendment legislation to free Fed-supervised  insurers fro the same minimum capital standers under Basel 3 than the banks).

Lew answered multiple inquiries into the IRS and White House handling of  issues, computer crashes at the White House, cybersecurity  and information-gathering initiatives and other elements of the financial and political system.

 

TRIA renewal teed up in House but legislation sharing the day may put brakes on FSOC

The House Financial Services Committee (HFSC) has a full agenda Thursday, June 19, with a mark up  and likely passage of the Terrorism  Risk Insurance Act Reform Act of 2014, which will extend the program for five years, albeit with an increased co-pay, and higher  program trigger amounts, through Dec. 31, 2019, along with consideration of  bills to slow down and open up to Congressional eyes  the Financial Stability Oversight Council (FSOC).

Housing and Insurance Subcommittee Chairman Randy Neugebauer is introducing the bill before the full committee.

The ease with which the House bill has been accepted, although it is more austere in what is provided for the insurance industry  than the Senate TRIA version, combined with the support for action, likely means the House legislation will sail through with broad Republican support,  until it meets the softer Senate version in conference committee. Then, real tussling could begin.

How the House Democrats will vote on Thursday is said to be a major factor in how the bill moves forward.

If the Democrats on the HFSC are led in a  vote against the TRIA renewal bill, there could be a floor fight. If they vote for it, the bill could go forward on the suspension calendar next week on two-thirds of a vote.

A key question is the Thursday vote of Rep. Carol Maloney, D-NY,  ranking member of the House Financial Services Subcommittee on Capital Markets and GSEs.

Maloney stated in May that raising the program trigger for conventional terrorist events from $100 million to $500 million  and increasing the recoupment of federal payments to 150 percent, which are both features in the Neugebauer bill, “are changes that go far beyond what the market will bear. The economic consequences of these proposed changes to TRIA for metropolitan areas like New York, which continue to be at risk of another attack, would be disastrous.”

However, her office pointed out that since key components have changed, this statement does NOT apply to the current draft.

Another major consideration the industry is concerned about is how  the Congressional Budget Office (CBO) scores the bill, and for how much, given the proposed recoupment level.

Beginning on January 1, 2016, the House bill increases the amount that the Treasury Secretary is required to collect through terrorism loss risk-spreading premiums from 133 to 150 percent of the federal payments made subject to mandatory recoupment. The bill clarifies that the amount of federal payments subject to mandatory recoupment shall be equal to the lesser of the total of federal payments made or the insurance marketplace aggregate retention amount.

But so far the insurance industry is on board to get this bill quickly  through Chairman Jeb Hensarling’s, R-Texas,  committee.

“Any sign of progress is a welcome one,” said Jimi Grande, political affairs senior vice president for the National Association of Mutual Insurance Companies (NAMIC) of the bill that would bifurcate nuclear, biological, chemical or radiological type (NBCR) of attacks from the conventional terrorism trigger amounts.

The American Insurance Association (AIA) praised the growing momentum for TRIA reauthorization in the House but cautioned that certain provisions of the bill could decrease market capacity, citing the bifurcation of conventional terrorism acts with the NBCR attacks. This differentiation “falsely assumes that the insurance market operates based on the same distinctions,” stated AIA president and CEO Leigh Ann Pusey.

Ken Crerar, president and CEO of the Council of Insurance Agents and Brokers (CIAB) stated the organization which represents the largest commercial insurance brokerage firms is “so gratified to see great legislative progress…”

“We hope the Committee and the full House act swiftly so that the Congress can send TRIA legislation to the President for his signature before the August recess,” stated Nat Wienecke, senior vice president, federal government relations at the Property Casualty Insurers Association of America (PCI).

PCI and its member companies applauded what they said were several improvements that have been made in the legislation, including the “reasonable reauthorization duration, maintenance of the “20% insurer deductible,” and incorporation of  “very important technical corrections to the terrorism certification process.”

The Senate bill, S. 2244, contains a seven-year reauthorization and is awaiting a full vote by the Senate.

“We echo the calls of all the key stakeholders for the Financial Services Committee to advance the legislation which has been authored by Chairman Neugebauer. We’re particularly grateful for the Chairman’s decision to seek a five-year extension of the program—just one of many substantive improvements that have been made after close and deliberate consultation with all of the major interests in recent weeks,” Crerar stated.

As Crerar noted, the appropriate federal role in the terrorism insurance marketplace has been debated for 13 years —  and this is the fourth Congressional debate.

There are industry exposure concerns with the House bill but not many were voiced today, in advance of the mark-up.

The House bill increase of trigger amounts to $500 million at the end of five years, can be absorbed by large companies if their coverage as one company does not saturate the marketplace or have too great an area of concentration, but smaller insurers, who may be able to opt out of offering coverage, cannot absorb the higher amounts readily. The tilt in  terrorism risk exposure to only a few, large companies could  skewer the marketplace and raise prices, insurers worry.  And some in the insurance industry remain skeptical of the large co-share or co-pay on top of an already sharply increased trigger amount for federal coverage.

Congress, by and large, wants the industry to fend for itself more in underwriting terrorism risk but almost all of the insurance industry, although conceding the point, says it is not ready to fully expose itself to known and unquantifiable future losses because they are almost impossible now to underwrite and the capacity for full exposure is not there.

With regard to other proposed  insurance reform measures, many in the industry hope that Neugebauer can attach the ‘NARAB II’ legislation to facilitate interstate agent/broker nonresident licensure to the TRIA legislation. NARAB has support from almost all quarters, including the National Association of Insurance Commissioners (NAIC) and the Federal Insurance Office (FIO.)

The full HFSC will also mark up legislation to place a six-month moratorium on the authority of the FSOC to make financial stability decisions under section 113 of Dodd Frank. Asset managers and mammoth insurer MetLife, which has been under intensive review by the FSOC for almost a year as a systemically important financial institution, have resisted the suggestions that they are systemically risky  the financial markets.

Both the FSOC and the global Financial Stability Board (FSB) have begun examining whether regulated funds or their managers could pose risk to the overall financial system and thus should be deemed SIFIs.

U.S. mutual funds designated as SIFIs would be subject to new, bank-style prudential regulation that could significantly harm funds and the investors who rely upon them. Singling out individual mutual funds for inappropriate regulation or supervision would raise costs for fund investors and distort competition, among other harmful effects, according to the Investment Company Institute Viewpoints blog.

The HSFC will also be marking up H.R. 4387, the FSOC transparency and Accountability Act.

This bill would open up to varying degrees of participation  the FSOC processes to members of Congress, and to the boards and commissions of the agencies that serve on the FSOC, from the Securities and Exchange Commission (SEC)  to the National Credit Union Administration (NCUA.)  It would also make the FSOC subject to both the Sunshine Act and  the Federal Advisory Committee Act. It was introduced by Capital Markets and GSEs Subcommittee Chairman Scott Garrett, R-N.J.

The U.S. Treasury, which houses FSOC, did not comment on the FSOC measures but rarely comments on the particulars of  legislation. Treasury and the Obama Administration have acknowledged their support of TRIA renewal.

“I should add that we, Treasury, applaud the strong bipartisan action by the Senate Banking Committee to preserve the long-term availability and affordability of property and casualty insurance for terrorism risk.  A report of the President’s Working Group on Financial Markets recently affirmed the importance of TRIA to the national economy.  We look forward to swift action by the full Senate and the House to extend the program,” FIO Director Michael McRaith stated in a recent speech in New York this month.

How this will play  out if  the somewhat-hobbling FSOC legislation is attached to the TRIA renewal bill is another story. The next closed FSOC meting is next week, on June 24.