Regulating the bond insurers

The current problems for the municipal bond market arose when the bond or financial guaranty insurers’ credit rating was threatened by deterioration in the subprime mortgage market. The bond insurers had also insured billions of dollars of subprime structured securities. If the bond insurers were downgraded, then the municipal bonds they insured would lose their triple-A rating and would either have their own generally lower rating or in some cases no rating at all. In terms of addressing the crisis, the New York State Insurance Department, the primary regulator of most of the bond insurance companies in the US, have developed a three-point plan for the industry. First, bring in new capital and capacity. Second, prepare to deal with any chronically distressed companies. Third, develop new regulations that would seek to prevent a repeat of this problem. Here, Eric Dinallo , Superintendent of Insurance, New York, explains how his department is working on rewriting the regulations for bond insurance to prevent companies from taking on inappropriate risk in the future. The following is an edited extract from Mr Dinallo’s testimony on the municipal bond market and bond insurance industry before the Committee on Financial Services United States House of Representatives.