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March 26, 2009

Secretary Geithner Outlines Administration’s Plan for Regulatory Reform

In testimony before the House Financial Services Committee Thursday, U.S. Secretary of the Treasury Timothy Geithner called for comprehensive reform of the financial services regulatory system. Although the hearing titled “Addressing the Need for Comprehensive Regulatory Reform” was intended to be the first glimpse of the administration’s regulatory blueprint, the testimony remained short on specifics.

In his statement, Geithner recommended that any outline for regulatory reform address four core elements:

  1. Systemic risk
  2. Consumer and investor protection
  3. Regulatory gaps
  4. International coordination

The focus of the hearing was largely on the first principle - addressing systemic risk. Geithner advised Congress that in order to properly protect the financial system, it was necessary to create a new resolution authority to administer an effective, orderly reorganization for large, troubled, non-bank financial institutions. This new authority would resemble the FDIC and cover any institution that had the potential to pose a risk to the entire financial system – potentially including insurance companies.

Pointing out that it was AIG’s financial products unit and not its insurance subsidiaries that caused the problem, Rep. David Scott, D-Ga., wanted to know if, in the case of another AIG, the new resolution authority would conflict with the current state-based regulatory structure. Geithner replied that he did “not mean we'd supplant or take away the authority states have over insurance companies.” Rather, he said he thought his proposal would play a “fully compatible role” with the current state-based system of insurance regulation. However, later in the hearing, answering questions from Reps. Ed Royce, R-Calif., and Paul Kanjorski, D-Pa., Geithner stated that he thought there was “a good case for introducing an optional federal charter” for insurance companies.

Clearly, there are many questions that still need to be answered. The administration did seem to signal that they want to tackle systemic risk before possibly addressing broader reforms down the road even though Geithner did not give any indication that he had solved the fundamental problem facing lawmakers – the definition of a systemically significant company. In fact, Geithner acknowledged that designating certain institutions as systemically significant would create a moral hazard. His only solution to this problem was to “design this [systemic risk regulator] correctly.”

Furthermore, there were no specifics regarding the broader regulatory restructuring to come. With so few details, NAMIC remains very concerned that the administration will make legislative recommendations that add another layer of duplicative, federal oversight to the current state-based system of insurance regulation. NAMIC is hopeful that the more detailed regulatory blueprint due to be released by the end of April will answer some of these questions.