Tuesday 17 July 2018

Regulators to axe 'too big to fail' gauge for risky insurers

'The US Treasury has rejected the idea of singling out specific asset management and insurance firms as systemically risky and criticised the FSB for mission-creep.' Photo: Bloomberg
'The US Treasury has rejected the idea of singling out specific asset management and insurance firms as systemically risky and criticised the FSB for mission-creep.' Photo: Bloomberg

Pete Schroeder and Michelle Price

Global financial regulators have decided to ditch a "too big to fail" gauge for assessing the riskiness of insurers, according to a source briefed on the matter, in a big win for companies such as American International Group (AIG) and Prudential Financial.

The Financial Stability Board (FSB) - which coordinates financial regulation across the Group of 20 Economies (G20) - is expected to announce in coming weeks a switch in focus from insurers' size to their activities when deciding whether to subject them to increased regulatory scrutiny, said the source, who requested anonymity because the matter has not been made public.

Companies singled out for such scrutiny are required to hold extra capital to cover potential losses, increasing overall business costs and potentially reducing shareholder returns.

The insurance industry has been lobbying for years for regulators to move to the activities-based approach, arguing that their huge size should not automatically qualify them as systemically risky and on the hook for onerous bank-like capital rules. The shift in the FSB's approach to designating globally systemically important insurers, or GSIIs, follows pressure from the US Treasury Department, which has been pushing the FSB to ease up on insurers and asset managers, the source said. A spokesman for the FSB declined to comment.

The Trump administration has pledged to overhaul regulations introduced following the 2007-2009 global financial crisis and put US interests first when engaging in international bodies such as the FSB and the Basel Committee of banking supervisors.

In September, a group of US regulators - known as the Financial Stability Oversight Council - removed AIG from its domestic list of systemically-important insurers, raising questions over whether the FSB would keep AIG on its global list and continue to add new firms.

The US Treasury has rejected the idea of singling out specific asset management and insurance firms as systemically risky and criticised the FSB for mission-creep.

The US Treasury is due to release a report on the FSOC designation process and powers, which critics have said are too opaque and unaccountable. AIG helped spark the global financial crisis, and the labelling of major financial institutions as systemically important stems largely from its $182bn US government-led rescue in September 2008.

Reuters

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