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Regulators Debating Too-Big-to-Fail Insurer List, Sants Says

Insurance companies considered too big to fail may be identified by global regulators as part of an initiative to reduce risks taken by firms so crucial to the financial system that their collapse could be catastrophic.

Regulators are “debating whether it would be reasonable to create a list” of insurance companies that may be subject to tougher rules, Hector Sants, chief executive officer of the U.K.’s Financial Services Authority, said in an interview in London today.

“The view of the FSA is that it’s a question that has to be debated, rather than an answer that is being reached,” Sants said in an interview. “It’s a good debate to have.”

Discussions on systemically important banks are more advanced and the Group of 20 nations agreed in November that so-called SIFIs should face tougher capital rules than other lenders, increasing their ability to take losses. The extra reserve requirement would go beyond capital rules for internationally active members of 7 percent of their risk weighted assets.

Bundesbank board member Andreas Dombret said last week he expected capital buffers of 2 to 3 percentage points for a group of “some 25 to 30 banks” deemed too-big-to-fail because their collapse could endanger the wider financial system and hurt economic growth.

Insurance Regime

Speaking at a conference organized by the FSA and Bank of England to discuss regulation of the insurance industry, Sants told the audience that officials understood that banks and insurers were different types of business and needed to be treated differently.

The need for a special resolution regime “is clearer” for banks than insurers because banks face the risk of runs, said Andrew Haldane, executive director for financial stability at the central bank. The need for a new regime was “learned painfully” in the case of Northern Rock Plc, which had a depositor panic in 2007 and had to be rescued by the government.

Still, the bailout of American International Group in 2008 shows that it’s possible for insurers to have systemic importance and supports the case for regulators to consider how to deal with them, Haldane said. If history had been different, and AIG failed while Lehman Brothers Holdings Inc. was rescued, the consequences for the global financial system may have been worse, he said. Lehman declared bankruptcy in September 2008.

“It is possible to envisage states of the world where insurance-type activities could ripple more widely to influence systemic risk,” he said. “Does that make the case for a separate resolution regime per se? Not necessarily.”

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