DATE: JANUARY 16, 2009

TO: NCOIL LEGISLATORS

FROM: MIKE HUMPHREYS, NCOIL

RE: NEW FINANCIAL REFORM REPORT

CALLS FOR FEDERAL INSURANCE OVERSIGHT

Below are links to the following information:

  • Obama Advisor Presents Plan to Alter Global Financial System (1/15 Washington Post)
  • Group of 30 Urges National Insurance Regulator (1/15 Business Insurance)
  • Group of Thirty Report Financial Reform: A Framework for Financial Stability (1/15)

Yesterday the Group of Thirty (G30) released a report entitled Financial Reform: A Framework for Financial Stability. The report—which calls for national insurance regulation—is particularly noteworthy because the lead author is Paul Volcker. Mr. Volcker is a former Chairman of the Federal Reserve and will serve as a special White House advisor to incoming President Obama.

BACKGROUND

In July 2008, the G30 launched a financial reform project under the leadership of a Steering Committee chaired by Mr. Volcker. The Committee was comprised of financial experts from the United States, Brazil, France, Germany, Israel, Italy, and the United Kingdom, among others.

The report focuses on a long-term restructuring of the financial system, and does not address immediate emergency regulations. While the report is intended to be useful to policymakers in all countries, several of the issues and recommendations are U.S.-focused.

NCOIL ISSUES

The report addresses several issues of interest to NCOIL including insurance regulation, credit default swaps, principles-based regulation, and international accounting.

INSURANCE REGULATION

  • The report calls for national regulation of “large internationally active insurance companies.”

CREDIT DEFAULT SWAPS

  • The report calls for the establishment of a national system of regulation and oversight of Over-the-Counter (OTC) markets and Credit Default Swaps (CDS).
  • It recommends that national regulators should share information to create a “consistent regulatory framework on an international scale.”

PRINCIPLES-BASED REGULATION/ACCOUNTING

  • The report argues that fair value accounting principles should be reevaluated “with a view to developing more realistic guidelines for dealing with less liquid instruments and distressed markets.”
  • It calls for “development of principles-based standards that better reflect the business model of these institutions, apply appropriate rigor to valuation and evaluation of intent, and require improved disclosure and transparency.”
  • It also calls for more flexible accounting principles.

COMMENTARY

This marks the second report calling for some degree of federal insurance regulation. It follows the recent Government Accountability Office (GAO) report and precedes a Congressional Oversight Panel (COP) report to Congress that is due next week, which may suggest more of the same. The ongoing financial crisis—and the lack of effective financial services regulation at the federal level—has convinced Members of Congress and the incoming administration of the need for comprehensive reform.

The buzz word these days is “systemic risk” and leaders are leaning toward creating a “systemic risk regulator” whose oversight would include insurance. Reform proponents have also talked about a “lack of information” at the federal level, which could lead to more support for the creation something like an Office of Insurance Information (OII). President-Elect Obama has said that regulatory reform will be near the top of his agenda and that he would like to see the development of a legislative package before April 1, 2009.

NCOIL will continue to monitor financial services activity. At the upcoming NCOIL Spring Meeting, legislators will discuss the recent reports and NCOIL strategy.

REPORT RECOMMENDATIONS

The report includes four (4) “core recommendations” as well as 18 additional recommendations that address the scope of regulation, reform, corporate governance, and transparency, among other things.

Core recommendations follow.

1.Gaps and weaknesses in the coverage of prudential regulation and supervision must be eliminated. All systemically significant financial institutions, regardless of type, must be subject to an appropriate degree of prudential oversight.

2.The quality and effectiveness of prudential regulation and supervision must be improved.This will require better-resourced prudential regulators and central banks operating within structures that afford much higher levels of national and international policy coordination.

3.Institutional policies and standards must be strengthened, with particular emphasis on standards for governance, risk management, capital and liquidity. Regulatory policies and accounting standards must also guard against procyclical effects and be consistent with maintaining prudent business practices.

4.Financial markets and products must be made more transparent, with better-aligned risk and prudential incentives. The infrastructure supporting such markets must be made much more robust and resistant to potential failures of even large financial institutions.

ADDITIONAL RECOMMENDATIONS

Additional recommendations in the report include, among others:

  • strengthening banking regulation by calling for supervision by a single regulator, stronger restrictions on conflicts of interest in corporate families, and limits on deposit concentrations
  • resolving the role of government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac in the U.S—avoiding regulatory hybrids with private ownership and government sponsorships
  • eliminating regulatory gaps and strengthening regulator independence from outside political and market pressures
  • an increased role for central banks in promoting financial stability
  • enhancing international regulatory cooperation and closing gaps related to offshore banking systems
  • strengthening corporate governance standards
  • revising the regulation of rating agencies for more accurate and accountable risk assessments
  • creating a federal backstop to manage the resolution of failing non-banking institutions in the U.S.

Feel free to contact me by reply e-mail or at 202-220-3014 should you have any questions.