Bernanke Tells House Panel Mega Insurers Need U.S. Oversight

WASHINGTON—Federal Reserve Board Chairman Ben Bernanke told Congress today that the financial crisis has demonstrated the need for “systemically important” insurance companies to be subjected to federal controls.

In testimony today before the House Financial Services Committee he said such large insurers should be under the same consolidated supervision that currently applies only to bank holding companies.

While he did not mention the company by name, his comments about insurance companies clearly pointed to American International Group, which was rescued with a government bailout last September.

He added that while the Federal Reserve Board is “well suited” to the task of being the consolidated supervisor for systemically important non-banks, a system for resolving large, troubled non-banks such as insurers “analogous to the regime currently used by the Federal Deposit Insurance Corporation” is also needed.

In his testimony, he also called for creation of an oversight council made up of all the agencies involved in financial supervision which would have the authority to monitor and identify emerging risks to financial stability across the entire financial system, to identify regulatory gaps and to coordinate the agencies’ responses to potential systemic risks.

Moreover, he said, all federal financial supervisors and regulators—not just the Federal Reserve—should be directed and empowered to take account of risks to the broader financial system as part of their normal oversight responsibilities.

Mr. Bernanke’s proposals are consistent with the legislative concepts advanced by the Obama administration to increase oversight of the financial system.

However, he barely touched on an administration proposal currently being debated in the House that would reduce the Federal Reserve’s power by creating an independent Consumer Finance Protection Agency.

That drew a rebuke from Rep. Melvin Watt, D-N.C. “Five sentences on consumer protection when everything else gets substantially more space,” Rep. Watt said. “It is just not a good message to send.”

Republicans on the panel were critical. Rep. Spencer Bachus, R-Ala., ranking minority member of the panel, said, “Chairman Bernanke, in the run-up to the worst financial and economic crisis since the Great Depression, the Federal Reserve offered few warnings of the forces undermining the foundations of our markets and the industrial and commercial structures on which we depend.”

“And yet, we are now asked to designate the Federal Reserve as the agency in which we place our trust as the systemic risk regulator to protect against the forces that will endanger the economy in the future. In my questioning, I will ask what has changed that should make us believe the Fed will be up to the task in the future that it so manifestly could not handle in the past,” Rep. Bachus added.

Republicans are proposing to strip the Fed of its regulatory and supervisory powers and leave it only with the authority to conduct monetary policy.

Instead, they propose creating a council “with members from a broad spectrum of agencies” to oversee financial institutions.

“It also seems unfair to ask one agency to handle a responsibility as complex and difficult as monetary policy and the other responsibilities proposed in the administration’s plan,” said Rep. Bachus.

Under the scheme suggested by Chairman Bernanke, he said, “all systemically important financial institutions would be subjected to the same framework for consolidated prudential supervision that currently applies to bank holding companies.”

Mr. Bernanke said such action would prevent financial firms that do not own a bank, but that nonetheless pose risks to the overall financial system because of the size, risks, or interconnectedness of their financial activities, from avoiding comprehensive supervisory oversight.

“Besides being supervised on a consolidated basis, systemically important financial institutions should also be subject to enhanced regulation and supervision, including capital, liquidity and risk-management requirements that reflect those institutions’ important roles in the financial sector,” said Mr. Bernanke.

“Enhanced requirements are needed not only to protect the stability of individual institutions and the financial system as a whole, but also to reduce the incentives for financial firms to become very large in order to be perceived as too big to fail,” Mr. Bernanke explained.

The resolution authority, Mr. Bernanke said, would provide the government the tools to restructure or wind down a failing, systemically important firm in a way that mitigates the risks to financial stability and the economy and thus protects the public interest.

He said such an authority would also provide the government a mechanism for imposing losses on the shareholders and creditors of the firm.

“Establishing credible processes for imposing such losses is essential to restoring a meaningful degree of market discipline and addressing the too-big-to-fail problem,” the Fed chairman advised.

“The availability of a workable resolution regime also would replace the need for the Federal Reserve to use its emergency lending authority under section 13(3) of the Federal Reserve Act to prevent the failure of specific institutions,” Mr. Bernanke added.

This was the catch-all provision the agency used to provide more than $180 billion in cash in return for 79.9 percent of the company’s stock in order to prevent its insolvency. The arrangement has been adjusted several times since the original AIG bailout.