Federal Deposit Insurance Corp. Chairman Sheila Bair says regulators tackling the “too big to fail” problem need to train their sights on insurers and hedge funds as well as banks.
Speaking in Istanbul, Turkey before the International Institute of Finance, Bair said regulators need to scrap the “too big to fail” doctrine and reassess how they regulate systemically important institutions. Bair stressed for a new regulatory regime to succeed, it would need authority over non-bank institutions, such as insurance companies, as well.
“I am concerned that singling out only large and complex bank holding companies could reinforce too big to fail,” she said. “Because of this, I believe that the new regime should apply to all bank holding companies that are more than just shell companies and to their affiliates regardless of whether or not they are considered to be systemic risks. Applying this resolution mechanism to firms that are not affiliated with banks, such as hedge funds and insurance companies, presents some difficult issues.”
Bair proposed formation of a council of national regulatory agencies that would be tasked with monitoring systemic risk. She also suggested several specific anti-risk measures including limits on leverage, minimum securitization requirements, better oversight of derivatives, and the reform of the rating agencies.
She also urged greater international cooperation.
“The largest financial firms are global firms,” she said. “However, they operate under national statutes focused on domestic concerns. Today, there is no international resolution process. In a crisis, the domestic resolution laws of most countries are simply inadequate to deal with cross-border financial firms.”
Bair comments echo those recently expressed by Paul Volcker, Chairman of the Obama administration's Economic Recovery Advisory Board. In September testimony before the House Financial Services Committee, Volcker proposed a new “resolution regime” for insolvent or failing non-bank institutions of potential systemic importance.
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