Is Berkshire Hathaway Too Big To Fail? Ask The Bank of England

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The Bank of England questioned the United States Treasury regarding its lack of enthusiasm to subject Berkshire Hathaway, the conglomerate controlled by billionaire investor Warren Buffett into a stricter scrutiny.

According to Alistair Gray, Tom Braithwaite and Stephen Foley of The Financial Times, the Bank of England sent a letter to the U.S. Treasury, and asked why the reinsurance operations of Berkshire Hathaway were not included in the provisional list of “too big to fail” institutions, which was prepared by the Financial Stability Board (FSB).

At present, regulators implemented a worldwide initiative to protect the financial system. Nine major insurance companies including American International Group, Allianz, Metlife, and Prudential Financial were identified as globally, systemically important financial institution (SIFI). Such designation means the companies could trigger a financial crisis if they fail and are required to maintain more capital to cover unexpected losses.

Metlife filed a lawsuit against the United States government as part of its effort to be excluded from the list of systemically important financial institution (SIFI).

FSB postponed identifying “too big to fail” reinsurers


The FSB was expected to disclose the list of reinsurers deemed as “too big to fail.” The regulator postponed the release of the list after a consultation with national authorizes in November due to “pending further development of the methodology.”

Insurance companies were upset by the failure of the regulator to designate reinsurers, which are considered more important to the financial system.

Last October, the Bank of England requested an explanation from its U.S. counterpart regarding the absence of Berkshire Hathaway from the provisional list of “too big to fail.”

The Bank of England confirmed the existence of the letter in response to the request of under the UK Freedom of Information. The central bank declined to reveal the contents of the letter.

Insurance is significant to Berkshire Hathaway

The insurance industry is significant to Berkshire Hathaway. The conglomerate’s underwriting and investment profits accounted 27% of its net earnings last year.

Berkshire Hathaway owns Geico, a leading insurance company. Its reinsurance operations include Berkshire Hathaway Reinsurance and General Re.

Last year, $41.3 billion of the approximately $195 billion revenue of the conglomerate came from insurance premiums earned. Berkshire Hathaway Reinsurance was sixth largest reinsurer worldwide in terms of gross premiums written in 2013, according AM Best, a rating agency.

In his latest letter to shareholders, Buffett said, the insurance industry had “been the engine that has propelled our expansion since 1967.”

In recent years, Berkshire Hathaway pulled back from underwriting reinsurance risks due to concern that premiums became too low.

Berkshire Hathaway meets the threshold to be designated “too big to fail” under the U.S. process given the fact that it has more than $50 billion in assets and over $3.5 billion of derivative liabilities.

The Financial Times noted that US regulators have not opted to subject Berkshire Hathaway into increased oversight. Some insurance executives are already complaining about the increased regulatory scrutiny of the industry.


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