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Bank of England Deputy Governor Paul Tucker said regulators must allow for the orderly failure of insurance companies to complement officials’ push to shield taxpayers from having to rescue failing banks.
“Insurers must be able to fail quietly, in a controlled, orderly way,” Tucker said at the Association of British Insurers in London today. “Insurers are significant investors in bank paper. In the future, whether in the U.K. or elsewhere, you will not be protected by an implicit guarantee from the state for those investments. Over time, that will be good for stability because it will increase market discipline. But it will be a new world for the insurance industry to adjust to.”
Tucker said officials face challenges in creating such a regime because there are few recent examples of the collapse of a “large traditional insurer,” while most countries’ arrangements for managing failing financial institutions are limited to deposit-taking firms. The Bank of England will address this issue as it takes on new powers to regulate the financial system.
The importance of a resolution regime for insurers “will be underlined as we -- and I mean the global community -- move towards a world without a safety net for banks, leaving holders of bank bonds exposed to risk,” he said.
He also said that central bank officials have “been dismayed” by the costs for insurers and regulators to move to the Solvency 2 regime and by the strains on oversight from a complex system of rules.
The objective of the bank’s new Prudential Regulation Authority is “effective prudential supervision” that isn’t “mesmerized by checking compliance with a rule book or approving the details of individual models,” he said. Instead, supervision must address “the big risks that would undermine the safety and soundness of a firm.”
Tucker said he has spoken to Hector Sants, chief executive officer of the Financial Services Authority, and Martin Wheatley, the FSA’s managing director for conduct, about addressing the complexities related to with-profits policies. Arrangements for cooperation between the PRA and the Financial Conduct Authority on this issue will be set out in a Memorandum of Understanding later this year.
While “nothing must be done” to jeopardize securities lending, regulators must be “attentive” to insurance firms building shadow banks within their groups, Tucker said. The FSA is working with the industry and has tried to focus insurers’ senior management on the risks of lending high-quality securities against lower-quality collateral.
“Internationally, the authorities are going to have to go further, putting some structure around these markets,” he said. The Bank of England’s preference for “market-led” solutions and the need for transparency may mean a “Trade Repository” would have to be introduced, he said.
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