The National Association of Insurance Commissioners (NAIC) this week sent a letter (attached) to U.S. Senator Susan Collins, Ranking Member of the Senate Homeland Security and Governmental Affairs Committee, endorsing her legislation to restore confidence in the nation’s financial regulatory system. The Financial System Stabilization and Reform Act (FSSRA) of 2009 would fundamentally restructure the nation’s financial regulatory system to strengthen oversight and accountability.

In the letter, NAIC President Roger Sevigny wrote, “We believe your bill’s approach to monitoring and mitigating systemic risk through a Financial Stability Council (FSC) of regulatory agencies is consistent with the core principles for systemic risk regulation, as it relates to insurance, which the NAIC has developed and believes must be incorporated into any comprehensive systemic risk system.”

The legislation would create a Financial Stability Council (FSC) to serve as a “systemic-risk regulator,” to maintain comprehensive oversight of potential systemic risks to the financial system. It would have the ability to propose changes to regulatory policy, working with existing federal regulatory agencies, when systemic risk could emerge due to regulatory gaps or risky new financial products. The FSC would also have the authority to close regulatory “black holes” that pose a systemic risk when risky products or activities fall outside the current authority of federal financial regulators. The FSC would also have the authority to adopt rules on financial institutions to prevent the “too big to fail” problem, such as imposing different capital requirements, raising risk premiums, or requiring these institutions to hold a larger percentage of their debt as long-term debt.

“As a former Maine financial regulator, I am convinced that financial regulatory reform is essential to restoring public confidence in our financial markets and to preventing a recurrence of a crisis like this one,” said Senator Collins. “America’s Main Street small businesses, homeowners, employees, savers, and investors deserve the protection of an effective, new regulatory system that modernizes regulatory agencies, sets safety and soundness requirements for financial institutions to prevent excessive risk-taking, and improves oversight, accountability, and transparency. This legislation would fundamentally restructure our financial regulatory system to help rebuild the confidence of our citizens in our economy and help restore stability to our financial markets.”

Additional provisions of Senator Collins’s bill include:

• Closing the credit default swaps loophole to ensure oversight of a financial instrument that contributed heavily to the current financial crisis and the downfall of AIG. This regulatory gap allowed systemic risk to build in our financial system without the oversight and transparency needed to prevent a collapse;

• Imposing safety and soundness requirements on new investment banks. Under the current system, investment bank firms such as Bear Stearns and Lehman Brothers were left unregulated with no agency given the authority to examine the full scope of their operations;

• Merging the Office of Thrift Supervision (OTS) and Office of the Comptroller of the Currency (OCC) to consolidate and reduce the number of banking regulators, improving the effectiveness of the entire system. This merger has been recommended by many experts, and the Treasury Inspector General recently raised concerns about the objectivity and effectiveness of OTS;

• Protecting the right of states to regulate the insurance industry.