At the Cannes Summit in November 2011, the G-20 Leaders endorsed the Key Attributes of Effective Resolution Regimes for Financial Institutions (‘the Key Attributes’) as the international standard for resolution regimes. As reported in Bloomberg Business Week on August 12, 2013 [C. Bandel, FSB Extends Too-Big-To-Fail Resolution to Insurance Firms, August 12, 2013], the Financial Stability Board (“FSB”) issued a statement (Application of the Key Attributes of Effective Resolution Regimes to Non-Bank Financial Institutions, 12 August 2013 hereafter “Guidance”), announcing that it is currently studying the application of the Key Attributes to insurance companies. The Key Attributes are the core elements considered essential to make possible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms that make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims.
The Key Attributes are central to measures endorsed by G-20 members to address the “too big to fail” problem associated with “systemically important financial institutions,” defined as entities that, upon experiencing financial difficulty, may adversely affect the stability of the U.S., and possibly world, economy (“SIFIs”) . The Guidance is intended to assist jurisdictions and regulators in implementing the Key Attributes with respect to resolution regimes (or series of measures) for systemically important participants in the financial market infrastructure, including insurers. In effect, the term “resolution” provides financial regulators with a broad range of powers and options to resolve a firm that is no longer viable and has no reasonable prospect of becoming so.
The FSB has been described by former U.S. Treasury Secretary Timothy Geithner as "in effect, a fourth pillar" of the architecture of global economic governance. The FSB was established to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies vital to the health of the world’s financial system. The FSB, which includes all of the G-20 major economies, has been assigned a number of important tasks, working alongside the International Monetary Fund, the World Bank, and the World Trade Organization. [Ted Kaufman, An Unhappy Birthday for Dodd-Frank: The ‘Too Big To Fail’ Problem Gets Bigger, Part Two, Forbes Magazine, July 18, 2013]
A list of global systemically important financial institutions, or SIFIs, was first published by the International Association of Insurance Supervisors (“IAIS”) at the Cannes Summit in November 2011. That list was updated in 2012 to include 28 institutions, all of which were banking groups. Further, in July 2013, an initial list of nine global systemically important insurers was published by the G-20 to include U.S.-based insurers AIG, Prudential Financial, Inc. and MetLife, Inc., but also foreign-based insurers Aviva PLC, Axa S.A., Ping An Insurance (Group) Company of China, Ltd., Allianz SE, Generali and Prudential plc.
Insurers on this list face tighter regulatory scrutiny and additional capital charges that would act as a safety buffer to insolvency. As reported by Reuters, Axa’s Chief Executive Officer stated at a recent news conference the failure to date by European Union and U.S. regulators to reach agreement on uniform risk-capital rules, known as Solvency II, is a growing problem for the industry and increases the risk, should the EU countries be unable to reach agreement, of 28 different solvency regimes and an avalanche of added bureaucracy. [Allianz, Axa beat forecasts as oversight worries loom, Business Insurance, August 2, 2013]
The Guidance complements the policy measures for global systemically important insurers published by the IAIS on July 18, 2013. Additionally, on July 18, the G-20 required large insurers to hold more capital beginning in 2019 to cover risks posed to the financial system should they become insolvent. [UPDATE 1-G20 requires big insurers to hold more capital, CNBC Business News, July 18, 2013]
Prior to the G-20 announcement, the Financial Stability Oversight Council (“FSOC”), a U.S. government organization established by Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), named a number of non-bank firms as SIFIs, thereby burdening them with greater regulatory oversight by the Federal Reserve as well as, potentially, greater risk-based capital requirements and other restrictions. These firms are AIG, GE Capital and Prudential Insurance Group. The Dodd-Frank Act provides FSOC with broad authority to (1) identify and monitor excessive risks to the U.S. financial system arising from the distress or failure of large, interconnected bank holding companies or non-bank financial companies, or from risks that could arise outside the financial system; (2) to eliminate expectations that any American financial firm is "too big to fail"; and (3) to respond to emerging threats to U.S. financial stability. Of the three non-bank firms designated by FSOC as SIFIs, thus far only Prudential is contesting the finding that it poses a potential risk to the financial system.
However, FSOC is not without its detractors. In the opinion of Peter J. Wallison, the Arthur J. Burns Fellow in Financial Policy Studies at the American Enterprise Institute:
What the FSOC has done will be seen in the future as the most damaging action taken under the authority of Dodd-Frank. It has the potential to turn what are today competitive industries into financial sectors dominated by large, government-backed firms, exhibiting all the indicia of crony capitalism. The fact that it was done in the shadow of our disastrous experience with Fannie Mae and Freddie Mac, and while Congress was concerned about firms that are too big to fail, only demonstrates how mindless it really was.
[The American: The Journal of the American Enterprise Institute, July 18, 2013]
The pronouncements by the G-20 and the FSOC came shortly after the release in June 2013 of a report by the United States Government Accounting Office entitled Insurance Markets: Impacts of and Regulatory Response to the 2007-2009 Financial Crisis (the “GAO Report”). The GAO Report largely absolved the $1 trillion insurance industry of blame, heaping praise upon the industry as well as upon the proactive policies of state and federal regulators (both before and after the onset of the crisis), for successfully mitigating the impact of the crisis on the industry and for shielding most policyholders from the negative effects of the global recession.
Most significantly, the GAO Report found that:
- The number of insurance company insolvencies did not increase materially during the crisis;
- Insurance industry investment practices and a low interest rate environment helped mitigate the impact of the crisis;
- While the crisis had a generally mild effect on policyholders, some mortgage and financial guaranty policyholders received partial claims or faced decreased availability of coverage.
The GAO confirmed in its Report that AIG’s losses were brought about largely by activities of the company’s non-insurance financial products unit –activities that included securities lending – and not by its underwriting operations. The GAO Report found that actions by state and federal regulators and the National Association of Insurance Commissioners (“NAIC”) helped mitigate the effects of the crisis.
Specifically, the NAIC began requiring more detailed reports from insurers, changed a methodology to better reflect the value of certain securities and placed increased focus on insurers’ risks and capital adequacy and on oversight of non-insurance entities in group holding company structures.
In further response to the global recession, the NAIC developed the Own Risk and Solvency Assessment, an internal assessment of insurers’ business plan risks, expected to take effect in 2015, and amended the Insurance Holding Company System Regulatory Act to address transparency and oversight of holding company entities.
Nonetheless, calls have been growing for a “New Glass-Steagall” and an impressive list of economists, financial experts and bankers are advocating the orderly breakup of big banks. The list includes, among others:
- Several Nobel Prize-winning economists, including Joseph Stiglitz, Ed Prescott and Paul Krugman;
- Former Federal Reserve Chairmen Alan Greenspan and Paul Volcker;
- Former U.S. Secretary of Labor Robert Reich;
- Economic historian Niall Ferguson;
- Former Head of the FDIC Sheila Bair;
- The former Governor of the Bank of England , Mervyn King;
- United States Senators John McCain (R-AZ) and Elizabeth Warren (D-MA.);
- Former Chief Economist for the International Monetary Fund, Simon Johnson; and
- Former Federal Reserve Bank of New York economist and Salomon Brothers vice-chairman, Henry Kaufman.
Senators McCain and Warren maintain that Wall Street banks still pose a threat to the economy and taxpayers because they take too many risks and that the banking business should return to its historic roots. [Sen. Elizabeth Warren Starts Campaign to Force Banks to be Boring, Los Angeles Times, July 12, 2103; Warren, McCain Want to Bring Back Glass-Steagall, American Banker, July 11, 2013]. Senate candidate Warren campaigned in 2012 on the idea of breaking up the banks’ commercial and investment banking activities, arguing that if Wall Street banks want to make risky bets in financial markets, they should not be able to do so while still receiving a government backstop for their more traditional deposit-taking businesses. [POLITICO: Daniel Tarullo questions value of return to Glass-Steagall, July 15, 2013]
Even Sandy Weill, former CEO of Citigroup and the architect of Citigroup’s merger with Travelers’ Group, called for splitting up the commercial banks from the investment banks, in effect endorsing reinstatement of the Glass-Steagall separation in an interview with CNBC on July 25, 2012.Despite all of these efforts, including the designation of global SIFIs, the dedication of sovereign governments and international institutions to the effective resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, and other measures endorsed by G-20 members to address the “too big to fail” problem associated with “systemically important financial institutions,” have we fixed the things that most experts agree caused the meltdown of the global financial system in 2007-2009? Is another financial crisis inevitable?
As former U.S. Senator Ted Kaufman, formerly co-sponsor with Senator Sherrod Brown of the Brown-Kaufman SAFE Banking Act of 2010 and Chair of the Congressional Oversight Panel on the Troubled Asset Relief Program, concluded in his article in Forbes Magazine:
- The megabanks are even bigger and more than ever “too big to fail.”
- Regulatory agencies have largely failed to impose new rules with real teeth.
- Fannie Mae and Freddie Mac have not been fixed.
- The Obama administration has maintained the Wall Street-Washington revolving door.
- Derivative monitoring and control still have gigantic loopholes.
- The banks are still gambling with FDIC-insured money.
- The Fed’s recent capital requirements proposals are promising.
- No one has gone to jail [for the transgressions that led to the financial crisis in the first place], and no one will.
Reform of the credit-rating agencies is a long way off.
[Ted Kaufman, An Unhappy Birthday for Dodd-Frank As Momentum Builds For The Next Meltdown, Forbes Magazine, July 17, 2013]
Despite all efforts by U.S. federal and international regulators to identify and eliminate the causes of the global financial meltdown of 2007-2009, and to impose increasingly burdensome regulatory regimes and financial reporting requirements on some of the largest financial institutions in the world, the megabanks appear more than ever “too big to fail.” In testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C. on February 14, 2013, Federal Reserve Governor Daniel K. Tarullo reminded the Senate committee that considerable work remains to complete implementation of the Dodd-Frank Act and the post-crisis global financial reform program. Over the coming year, the Federal Reserve will be working with other U.S. financial regulatory agencies, and with foreign central banks and regulators, to propose and finalize a number of ongoing initiatives. He added: “we are focused on the monitoring of emerging systemic risks, reducing the probability of failure of systemic financial firms, improving the resolvability of systemic financial firms, and building up buffers throughout the financial system to enable the system to absorb shocks.” [Testimony of Governor Daniel K. Tarullo on the Dodd-Frank Act, February 14, 2013]
Financial crises are profoundly debilitating to the economic well-being of the nation. . The 2007-2009 financial crisis might have given birth to the Second Great Depression had the federal government, including the Bush and Obama Administrations and the Congress, not intervened to rescue several large banks, AIG and the U.S. auto industry. The efforts to identify the causes of and prevent a similar crisis have been half hearted and probably ineffective to date. Although progress is still being made, concrete and effective reforms have not yet been implemented. However, it is clear that financial regulators throughout the globe are working hard to prevent a future global financial meltdown before it is too late. The clock is ticking and the outcome of their efforts will not be known for years.