Imported wine in a new goblet?

On Monday 20th of June 2011,  the Bank of England and Financial Services Authority published a joint paper titled 'Our future approach to insurance supervision'

The to be formed Prudential Regulatory Authority (PRA) has among its objectives:

• Protection for policyholders
• Protection of the system from individual Insurer failures

Sales Suitability will be monitored by Financial Conduct Authority (FCA).

In the introduction section of the paper, among other things, FSA speaks of inadequacy of reserves as a recurring theme in past organizational collapses like Equitable Life (2000) and AIG (2009). But is it the adequacy of the reserves or the approach to investment of the reserves that should be looked at? Hope the underlying aim is that of a principle based regulation rather than a rule based one.


The report also details a Risk Assessment Framework with eight areas of evaluation of the risk viz., Impact of the firm on the policy holders and the system, External context, Business risks, Operational risk controls, Risk Management and governance, Financial Liquidity, Capital and Resolvability (Closing down). Stress testing, Audit, are mentioned as ways to assess the evaluation criteria.


I am not seeing anything ground breaking here. I am left wondering whether the AIG type of collapse can still happen under the proposed structure.

We don't want to learn from experience!!

In a Hearing before the House Financial Services Committee on June 16, 2011, Barry Zubrow, Chief Risk Officer, JPMorgan Chase & Co. uttered the following:

"None of the world’s five largest banks is a U.S. bank. U.S. banks represent 24 percent of the market share of the 50 largest global banks, down from over 50 percent only eight years ago; Chinese banks now hold 22 percent.
.........
If large U.S. banks are hobbled by uneconomic capital levels or risk restrictions, a U.S. company is not going to turn to smaller U.S. banks to underwrite a €1 billion debt offering paired with a euro/dollar swap, or to lend it $200 million, or to provide custody services for a new overseas subsidiary; rather, it is going to turn to our foreign bank competitors."

He was articulating that regulation is going too far.
I guess it is forgotten that eight years ago, the regulations were not as much as it is now. Even with the lower than current level of regulations that were existing the US banks managed to bring down their importance in terms of market share. It looks like Barry is arguing against his own case!!
Reading the full testimony is surrealistic. It can be found here - http://online.wsj.com/public/resources/documents/ZubrowHFSC.pdf