Geithner Affirms Systemic Risk Regulation, Rejects Regulatory Arbitrage

Secretary Geithner's statement makes explicit what many observers have insisted was inevitable. His comment is less "a shot across the bow" at this point than a statement of the obvious. And the fact that proponents of optional federal charter (OFC) have already muted their emphasis on the word "optional" shows that the message, implied or otherwise, had already begun to sink in.

We are still a long way off from knowing precisely what form insurance regulation will take in the wake of the financial crisis, but Treasury Secretary Tim Geithner may have resolved one issue today in his comments before the House Financial Services Committee.No one following the government's response to the crisis will have been surprised by Geithner's plan for "comprehensive regulatory reform," inactivities." But Geithner's specific comment addressing regulatory arbitrage is another matter:

"Financial products and institutions should be regulated for the economic function they provide and the risks they present, not the legal form they take. We can't allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints."

In other words, calling a product a credit default swap isn't going to free you of regulatory constraints. Geithner only implied AIG's actions in this comment, but he was quite specific later. Having cited the company name, he said:

"Let me be clear: the days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayer from losses must end."

While these comments were specifically about regulation at the level of systemic risk, they surely have implications for any other level of federal regulatory oversight of insurance that might be proposed. Assuming Congress had any appetite for optional insurance regulation to begin with, it is hard to imagine the body countenancing such a thing now that the Treasury Secretary has explicitly rejected the regulatory arbitrage as a matter of principle.

Secretary Geithner's statement makes explicit what many observers have insisted was inevitable. His comment is less "a shot across the bow" at this point than a statement of the obvious. And the fact that proponents of optional federal charter (OFC) have already muted their emphasis on the word "optional" shows that the message, implied or otherwise, had already begun to sink in.Secretary Geithner's statement makes explicit what many observers have insisted was inevitable. His comment is less "a shot across the bow" at this point than a statement of the obvious. And the fact that proponents of optional federal charter (OFC) have already muted their emphasis on the word "optional" shows that the message, implied or otherwise, had already begun to sink in.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio