A bit of wisdom was actually uttered on Capitol Hill last week. The nation’s chief securities regulator told the House Committee on Financial Services that it was “extraordinarily important” for policymakers to “listen to the expertise” of professionals before running regulatory roughshod over industry.
Unless her words are heeded, regulations spawned by the Dodd-Frank Act will further harm the economy.
What prompted the comment from Mary Jo White, chairman of the Securities and Exchange Commission, was a lawmaker’s reference to the recent designation of Prudential and two other insurance companies as “systemically important” financial institutions. The Dodd-Frank statute invites the government to impose heightened regulation on such “nonbank” firms.
Officials of the Federal Reserve are interpreting the statute as requiring them to impose rigorous capital and leverage requirements on insurers deemed to be systemically important. This is highly problematic because, as currently written, the requirements are “bank-centric” and thus conflict with the principles of sound insurance investment. (The differences between the two industries are one of the reasons they have been regulated differently for decades.)
Insurers dubbed “systemically important” will be subject to costly and intrusive regulation including data sharing, stress testing and copious reporting requirements. Unlike bank deposits, though, there is no real risk of a “run” on insurance company assets. Insurers engage in long-term investment to complement their long-term liabilities and rely on time-tested actuarial science to determine the level of adequate reserves.
Dodd-Frank was crafted in reaction to the 2008 financial meltdown. Yet the insurance industry is widely regarded as blameless for the housing bubble, its explosion and the ensuing economic calamity. The fact that the statute makes insurers a regulatory target exposes how badly both Congress and federal regulators have misinterpreted the real causes of the crisis.
Sen. Susan Collins, Maine Republican, who authored the relevant provision, argues that Congress never intended for regulators to apply bank-centric capital standards to insurance entities, which are already regulated by the states. She has introduced legislation to “clarify” that point.
Dodd-Frank was billed as a way to shield taxpayers from any more of the multibillion-dollar bailouts that resulted from the 2008 financial crisis. Ironically, the new regulatory regime further entrenches the dubious notion that some firms are “too big to fail,” thereby setting the expectation of future bailouts.
Prior to 2010, insurance was regulated solely by states. Federal regulators’ efforts to usurp states’ oversight could actually destabilize the industry rather than reinforce it.
A too-big-to-fail designation may erode company discipline under the assumption that the government will remedy future problems. There is also concern that distinguishing an insurer as systemically important will give an unfair advantage to firms that are regarded as “protected” by the federal government.
Indeed, “too big to fail” is more a political doctrine than an economic one. Business failure is both unavoidable and necessary; it rids markets of inefficiency and creates opportunities for innovation. Lacking objective criteria, the screening process for systemic importance has been left largely to the whims of the council, to whom Congress delegated unconstrained powers.
Ultimately, consumers will pay for this unnecessary regulation. Premiums will cost billions more, and intangible costs may well exceed that. Worse, the more regulators focus on phony risks, the more likely they will overlook real threats.
The federal government already wields punishing control of the U.S. economy and Americans’ lives. If regulators fail to “listen to expertise,” Congress should force them to do so.
- Diane Katz is a research fellow in regulatory policy at the Heritage Foundation.