U.S. financial regulation has gaps in risk oversight, insurance, infrastructure, global stability board finds

By Guest Contributor
September 3, 2013

By Nick Paraskeva, Compliance Complete contributing author

NEW YORK, Sept 3. (Thomson Reuters Accelus) – A Financial Stability Board (FSB) peer review of U.S. regulation found gaps in oversight of systemic risk, insurance firms and financial infrastructure.

The report called on the United States to develop the Treasury-led oversight council into a “systematic, analytical and transparent macroprudential framework” that better coordinates the work of its member regulators. The 10 agency heads in Financial Stability Oversight Council have not always seen eye to eye.

“Given the complex and fragmented U.S. regulatory and supervisory structure,” the FSB stated that it also looked to address overlaps or gap in roles and responsibilities of the agencies Such gaps were identified in the insurance sector run by individual states, and it recommends moving towards a more federal structure. Better supervision of financial market infrastructures (FMIs) such as swap central counterparties is also sought.

The review examined progress by the U.S. in supervisory areas of most importance for stability. The FSB reviewed if there is effective regulatory coordination and information sharing with other countries. It found good overall progress by U.S. authorities in meeting the recommendations issued by the International Monetary Fund n 2010. These were issued under the auspices of country reviews in the Financial Sector Assessment Program (FSAP).

The FSB is an international group of national authorities in 24 countries, responsible for financial stability. It is used by the Group of 20 major countries to ensure that agreed reforms are properly and consistently implemented. All FSB jurisdictions including the United States have committed to undergo an FSAP assessment every five years and complement that with an FSB peer review two to three years later. The new report is the FSB review.

Stability

FSB noted that Dodd-Frank addressed some gaps by creation of the Financial Stability Oversight Council (FSOC). However, it said that a more systematic stability framework than FSOC was needed. This should coordinate the work of the 10 member regulators, and also have a “more in-depth and holistic analysis of systemic risks”. The Office of Financial Research (OFR) was proposed as supporting FSOC in this goal.

FSB stated that FSOC can recommend standards in an area of responsibility of one of its members, but can only impose these in limited situations. The agency must respond publicly to final recommendations made by FSOC on a “comply or explain” basis. Such a difference arose after the failure in 2012 of the SEC to issue money market fund reforms, despite FSOC’s identification that they involved systemic risk.

The report states more clarity is needed in FSOC’s role “in reviewing proposed regulations prepared by member agencies to ensure consistency of treatment and minimize the scope for regulatory arbitrage”. If acted upon, this would change the relative powers of the otherwise independent agencies, and give more influence to the Treasury, which as chair of FSOC would have de facto approval rights over new rules.

Market infrastructure

Three separate U.S. agencies (the Federal Reserve, Securities and Exchange Commission and the Commodity Futures Trading Commission) are each responsible for supervising different systemic FMIs or utilities .All three are in the process of adopting international standards, known as the Principles for Financial Market Infrastructures, into their rules. The FSB recommend that the regulators issue indicative timelines for completing of the rulemaking process to give the market more clarity.

“FMI issues are particularly relevant given the global importance of US FMIs and the increasing reliance of US-based market participants on FMIs in other jurisdictions” said the FSB. It also recommended that U.S. agencies enhance cooperation on FMIs with foreign regulators. They should provide for liquidity risk by issuing Fed regulations on the maximum amount or eligible collateral for emergency lending to FMIs.

Insurance

U.S. insurance supervision involves multiple state regulators and no federal regulator. FSB recommended that the U.S. consider “migration to a more federal, streamlined structure”. The Federal Insurance Office (FIO) created under Dodd-Frank, is identified as the agency to enhance insurance monitoring. FIO should be strengthened, including by more staff, so it will be able to take action to address the issues and gaps.

In addition to structure, FSB also recommended better methods of supervision for insurance groups. This included consolidated financial reporting for all insurance groups and giving the lead supervisor power to assess the group’s financial condition. It requested that U.S states implement FSAP recommendations on state commissioner appointments and rulemaking powers, and funding and staffing for specialist skills.

State authorities were recommended to modernize solvency requirements for insurers into state law and the National Association of Insurance Commissioners should take measures to clarify the safety level targets for individual risks and the overall effect of reserving and capital requirements in its model laws. The insurance measures can be expected to face opposition from States, which was also a factor in the absence of key insurance reforms in Dodd-Frank.

“We expect Treasury to give deference to and be supportive of views of State regulators in international forums that focus on regulatory issues” said Ben Nelson, CEO of the insurance commissioners body, to Congress in June. NAIC is the U.S. standard-setting and regulatory group of chief insurance regulators from all 50 states. He added, the “FIO does not speak for insurance regulators”.

(Nick Paraskeva is principal of Reg-Room LLC (www.reg-room.com), which provides regulatory information and consultancy. He covers various facets of the banking and securities industry and delivers exclusive analysis through Thomson Reuters. He can be contacted at (212) 217-0403 and nparaskeva@nyc.rr.com. Follow Nick on Twitter@regroom. )

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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