The newly formed department represents the merging of the state's Banking and Insurance departments with hopes of avoiding the mistakes and lack of oversight that led to the subprime mortgage crisis and subsequent recession.
The DFS will be broken into five divisions: insurance, banking, financial frauds and consumer protection, real estate finance and capital markets.
"Credit default swaps have gone from essentially zero to about
Leading up to 2007, Pastore said, lenders would sign off on large numbers of subprime mortgages and then look to have insurance companies such as
The problem, Pastore said, was that insurance companies would guarantee these packaged mortgages thinking the housing market was secure and stable, and as a result the insurers often didn't have the capital on hand to cover the mortgages in the event they defaulted.
"Had there been some oversight, there would have been mandates that AIG (and other insurers) would have had to meet." Thus, Pastore said, came the DFS, which is "the next step in an effort to establish a closer connection – at least in terms of regulatory oversight – between the banking industry and the insurance industry."
"I think the fear from a community banking perspective is that you lump in very large institutions and organizations and if you set guidelines and rules for the major corporations, how will that impact community banking and our ability to really serve local people and local businesses?" Tolomer said.
Pastore said he thought there may have been some political motivation behind the formation. of the DFS. The department will be headed up by
"I think what's going on here is the governor wants to be closer to this issue," Pastore said. "Organizationally, I think the state is hedging its own bets and making sure, at the risk of organizational redundancy, no one can claim they're not looking at these issues."
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