If there is a path leading out of the realm of systemically important financial institutions (SIFIs), American International Group (AIG) might already be on it, AIG chief executive officer Peter Hancock told securities analysts on Friday.
Hancock made his remarks in a conference call to discuss AIG’s first-quarter profit, which was US$1.22 per share, slightly higher than the US$1.19 per share that analysts had predicted.
He also described the measures that AIG had been taking to strengthen its balance sheet and reduce risk.
One analyst asked whether AIG might go so far as to change its corporate structure to escape its current designation as a systemically important financial institution.
“The discussion of the off-ramp certainly means that there is a strategic question to be answered at some point down the road,” Hancock replied.
The analyst pointed to General Electric Co’s surprise announcement last month that it would break up its big financial division, GE Capital, and sell most of it, in part because GE Capital has also been designated a nonbank SIFI, along with AIG, Prudential Financial Inc and MetLife Inc.
Institutions that are so designated face heightened oversight by the US Federal Reserve and must build up their capital and generally use less borrowed money. Detailed rules are still being developed, but many analysts think that by making SIFIs more stable, the rules would also make them less profitable.
MetLife has sued the Financial Stability Oversight Council, which identifies the SIFIs, to have its designation rescinded. Prudential Financial chief financial officer Robert Falzon told a US Senate panel on Thursday that while Prudential did not agree with the designation, “what is not clear to us is what we can do to change the outcome, or even to reduce our systemic footprint.”
Hancock’s remarks suggested that he found SIFI status less objectionable and thought that AIG could work with its Fed regulators.
“We are still awaiting greater clarity on exactly how SIFI rules will be applied in the future,” he said, but so far, the Fed has “prioritized derisking exactly along the lines that management would have done already.”
AIG has about 200 other regulators, he said — in the 50 US states, the District of Columbia, the US’ territories and the many countries where AIG does business.
In the US, the individual states are the primary regulators of insurance, but that system was called into question in 2008 when troubles at AIG required a US$182 billion taxpayer bailout led by the Fed and the The US Department of the Treasury. State regulators had been examining the individual parts of AIG before the crisis, but the holding-company system turned out to be so vast and complicated that no state could examine all of it at once, leaving big pockets of hidden risk.
Under the Dodd-Frank Act of 2010, that job is to become the Fed’s once the SIFI rules are put in place. However, internationally, another set of capital and liquidity rules is being drafted for insurers, causing consternation among state insurance commissioners and some of the companies they regulate.
Federal Insurance Office director Michael McRaith told legislators that the international insurance standards body had already adopted the world’s first method for measuring the total capital of big global insurance systems and was now refining it and working on systems for absorbing big losses.
However, Falzon said that companies were concerned that if the international standards were issued first, they would end up misaligned with US rules.
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