Fed Envisions a Lighter Touch for Insurance Requirements
By John Heltman
WASHINGTON — The Federal Reserve’s proposals to set prudential and capital rules for insurance companies designated as systemically risky and smaller insurers with depository affiliates are sending a simple message: We can be tough, but fair. During a board meeting Friday, Vice Chairman Stanley Fischer pointedly asked whether the prudential standards being proposed would have kept AIG from the brink of insolvency during the financial crisis. “If the general framework for insurance companies had been in place just before late August 2008, would they have prevented the [liquidity crunch] at AIG?” Fischer asked. Thomas Sullivan, associate director of the Fed’s division of banking supervision and regulation, replied that the “combination of the two proposals before you would have addressed the risks and the stress that was confronted by AIG at the time of the crisis.”… Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that by effectively proposing to maintain the status quo, the Fed may in fact encourage insurers to get into the banking business — and that could be good news for small and midsized banks looking for a buyer. “I think that one of the takeaways from the non-SIFI framework is that, depending on how the final risk weightings are constructed, a major barrier to a new round of integration between banking and insurance will drop,” Petrou said. “This might be one of the most significant franchise value benefits for smaller and midsized insured depositories … in the last eight years.”