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WASHINGTON BUREAU -- Former Federal Reserve Board Chairman Paul Volcker is supporting the idea of offering insurers a national charter.
“Bring them – at least the big ones – under a framework,” Volcker testified Thursday at a House Financial Services Committee hearing on systemic risk.
Putting big insurers under the jurisdiction of a national regulator could keep the kinds of problems that have plagued American International Group Inc., New York, from happening again, Volcker said.
“I think a lot of the big insurance companies would welcome a national charter and the consistencies that would provide,” Volcker said. “I don't want to permit them into the safety net. But I do think that they ought to be regulated in a consistent way.”
Volcker, who is credited for helping bring U.S. inflation under control in the 1980s, also gave his opinion about how federal regulators responded to the threat of AIG collapsing.
Officials at the Federal Reserve System and in the U.S. Treasury Department “had to make a very quick decision about an area that nobody could understand the full implications of,” Volcker said. “Everybody got in over their heads. And they did what was necessary in a very disturbed situation to provide money. And it’s become now, as you know, $150 billion, $180 billion, whatever it is. It’s, you know, outrageous in a sense. But I understand how they got there. That’s what we want to avoid.”
Preventing similar crises from occurring in the future will be complicated, because of the need to distinguish ordinary retail financial services activities from what appear to be riskier activities, Volcker said.
A bank customer should, for example, be able to walk into a bank branch and ask the bank to sell a batch of securities, Volcker said.
“If the bank is going to handle that, it’s going to have to have some kind of a trading operation, a foreign exchange operation,” Volcker said. “But there is a clear distinction between customer-related trading activity and pure proprietary trading.”
Some big institutions already have proprietary trading desks that are separate from the trading desks that serve retail customers, Volcker said.
AIG “had this trading operation, a little trading operation that made a lot of money for a while and it got out of hand -- and mostly credit default swaps,” Volcker said. “No regulator was looking at it.”
The trading activity had nothing to do with AIG’s insurance business, Volcker said.
In that case, regulators should have raised questions, Volcker said.
House Financial Services Committee Chairman Barney Frank, D-Mass., told Volcker, “The question of an optional federal charter for insurance, particularly life insurance, is on the committee's agenda for probably next year.... The question of an optional charter is a very important one. It’s a request we get from the international community.”
But “there’s a lot of resistance to it at the state insurance commissioner level here,” Frank said.
The Financial Services Committee will provide a full hearing for an OFC proposal backed by Rep. Ed Royce, R-Calif., Frank said.
Advocates of OFC proposals want to give insurers a choice between choosing a traditional state charter and supervision by state regulators, or a new federal charter that would put insurers with that charter under the jurisdiction of a new federal insurance regulatory agency. The American Bankers Insurance Association, Washington, put out a statement welcoming Volcker’s expression of support for the OFC concept.
“To suggest that the states can appropriately police insurance companies with worldwide operations, when other nations are loudly suggesting a global systemic risk regulator, is naïve,” ABIA Executive Director Kevin McKechnie says. “Clearly, solvency is a federal question.”