DATE: JUNE 17, 2009

TO: NCOIL LEGISLATORS

FROM: SUSAN NOLAN

NCOIL EXECUTIVE DIRECTOR

RE: PRESIDENT OBAMA UNVEILS FINANCIAL REFORM PLAN

President Obama’s financial regulatory reform plan, A New Foundation: Rebuilding Financial Supervision and Regulation, and an Executive Summary are available here.

The following information is provided for your review:

  • Obama Sets Off Financial Reform Debate With Plan (6/17 The Hill)
  • States to Lead – For Now (6/16 National Underwriter)

SUMMARY

President Obama today released his long-anticipated plan to financial services regulatory reform plan. The 89-page plan—which does not call for an insurance OFC—addresses systemic regulation, bank oversight, derivatives, consumer protection, and international cooperation, among other things. It advocates for strengthening the regulatory authority of the Federal Reserve (“Fed”)—making it the systemic risk regulator—and would create several new federal entities.

The plan says that its recommendations seek to meet five objectives:

  1. promote robust supervision and regulation of financial firms
  2. establish comprehensive supervision of financial markets
  3. protect consumers and investors from financial abuse
  4. provide the government with the tools it needs to manage financial crises
  5. raise international regulatory standards and improve international coordination

Secretary Geithner will overview the plan to the U.S. Senate Banking and House Financial Services Committees tomorrow morning and afternoon, respectively.

FINANCIAL REFORM PLAN

REGULATION OF INSURANCE

Insurance is a small part of the reform plan. The plan calls for enhanced oversight of the insurance sector and says that “it is important…that we develop a modern regulatory framework for insurance.”It does not seem to advocate for federal insurance regulation.

Office of National Insurance

The plan calls for the establishment of an Office of National Insurance (ONI) within Treasury. As outlined, the ONI resembles Congressman Paul Kanjorski’s legislation to create an Office of Insurance Information. The ONI would:

  • gather insurance information
  • identify the emergence of any problems or gaps in regulation that could contribute to a future crisis
  • recommend to the Fed any insurance companies that should be supervised as “Tier 1 FHCs” (Tier 1 Financial Holding Companies are defined as large firms that, due to their size, leverage, and interconnectedness, can pose a threat to the financial stability of the U.S. economy)
  • represent U.S. interests abroad, including by entering into international agreements

Principles for Insurance Regulation

The plan says that Treasury would support the following six principles for insurance regulation—which could be done by the states:

  1. effective systemic risk regulation with respect to insurance
  2. strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies
  3. meaningful and consistent consumer protection for insurance products and practices.
  4. increased national uniformity through either a federal charter or effective action by the states
  5. improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business
  6. international coordination

REGULATION OF SYSTEMIC INSTITUTIONS

The plan calls for:

  • creating a Financial Services Oversight Council—to replace the President’s Working Group—of federal financial regulators to identify emerging systemic risks
  • providing the Fed with authority to regulate Tier 1 HFC’s
  • applying stronger capital, liquidity,and other standards to Tier 1 HFC’s

REGULATION OF CREDIT DEFAULT SWAPS/DERIVATIVES

The plan calls for:

  • clearing of all standardized OTC derivatives through regulated counterparties (CCPs)—who will impose margin requirements and other risk controls
  • moving all standardized derivatives onto regulated exchanges
  • establishing a regulatory regime for derivative dealers and active firms that includes conservative capital requirements, business conduct standards, and reporting requirements
  • authorizing the CFTC and SEC to impose recordkeeping and reporting requirements

REGULATION OF BANKS

The plan calls for:

  • creation of a National Bank Supervisor to conduct prudential regulation of all federally chartered depository institutions
  • elimination of the federal thrift charter
  • treasury to reassess existing capital requirements and the supervisory structure for banks and bank holding companies

ADDITIONAL POINTS OF INTEREST

The plan recommends, among other things:

  • creating aresolution regime—modeled after the FDIC’s authority to resolve insured banks—to wind down failing bank holding companies and Tier 1 HFC’s
  • requiring the Fed to receive prior written approval from Treasury for emergency lending under its “unusual and exigent circumstances” authority
  • creating of a Consumer Financial Protection Agency as an independent agency with broad jurisdiction to protect consumers in consumer financial products. (Though the scope is broad, the agency appears intended to address lending products such as credit and mortgage loans.)
  • reviewing fair value accounting rules and recommending that accounting standard setters make progress toward a single set of global standards
  • requiring sponsors/originators of securitized credit exposures to retain an economic interest in the exposure
  • reducing reliance on credit rating agencies by strengthening SEC regulation of the agencies and reducing regulatory reliance on credit ratings

Feel free to contact me by reply e-mail or at 518-687-0178 or Mike Humphreys at or 202-220-3014 should you have any questions.