Unsurprisingly, minds failed to be changed, and Prudential Insurance lost its appeal before the Financial Stability Oversight Council (FSOC) this week, despite strong opposition from the independent insurance expert on the insurer's ability to cause systemic risk to or within the economy if it failed.
The council presumably voted again 7-2, meeting the two-thirds of sitting FSOC voting members, with the abstention of Securities and Exchange Commission Chairwoman Mary Jo White, to designate Prudential a systemically important financial institution (SIFI) despite Prudential's appeal on July 23 that it was not, even as one of the world's largest life insurers, a SIFI. This would mirror the initial vote June 3. Prudential has more than $1 trillion in assets but — unlike AIG, which accepted the mantel of its formal SIFI designation in July — doesn't have half its business outside the life insurance industry.
Under the Dodd-Frank Act, within 30 days following receipt of the notice, the company is entitled to bring an action in U.S. federal court for an order requiring that the final determination be rescinded, Prudential said in an 8-K filing today.
"We are reviewing the rationale that FSOC gave us and we are reviewing our options," said a spokesman for the company.
Prudential, of course, asked for the appeal to its designation in the first place under Dodd-Frank guidelines.
The company has already been designated a global systemically important insurer (G-SII) by the Financial Stability Board of the G-20, as have AIG and MetLife in the U.S., thereby sealing their fate as SIFIs in the U.S., some would say. One cannot be a G-SII and not be SIFI, and still be subject to Fed oversight.
The designation means that Prudential will be subject not only to enhanced standards imposed by the Federal Reserve Board, but also to strict minimum capital requirements under Basel III that will apply to all SIFIs and savings and loan holding companies, regardless of their primary insurance business models.
Independent member Roy Woodall as well as Federal Housing Finance Agency (FHFA) Chairman Ed DeMarco likely voted against the designation, as they did initially, back on June 3. They likely joined FSOC nonvoting member and state regulatory insurance representative, Missouri Insurance Director John Huff, in rejecting the majority's opinion that a life insurance company is subject to runs on the bank and contagion that threaten the financial system. FSOC and Treasury did not immediately respond, but the minutes and the rationale will be justified at some future point.
Huff has said publicly that he does not believe that some members of FSOC understand insurance, pointing to the FSOC analysis used for AIG's life business, which cites runs on the life business, cashing in of policies and the spread of such policyholder panic to other life insurers as cause for marketwide economic instability.
There is legislation pending in Congress that would alleviate the Basel III strictures so they are more tailored to the business of insurance, and as late as Monday, Sens. Sherrod Brown, D-Ohio, and Mike Johanns, R-Neb., wrote to their colleagues asking them to join them in "clarifying the law" to prevent the "bank-centric standards from being applied to insurance and causing serious challenges for them and possibly for their policyholders. The Senators are looking for broad bi-partisan support for their bill, S. 1369, that will fashion Basel III to the long-term asset to long-term liability matching business of insurance, rather than the short-term debt-funding model of banks.
Fed officials have suggested in testimony that a legislative fix is necessary to address this part of Dodd-Frank, known as the Collins Amendment.
A Treasury spokesperson said back in July that the FSOC "has developed a robust process for evaluating whether a nonbank financial company should be subject to [Fed] and to enhanced prudential standards. Although Treasury and FSOC do not disclose insurers under review, MetLife has acknowledged it is in stage three of SIFI review, and Huff has said other nonbank institutions, a number of them, are also in various stages of review.
Prudential's decision was different than AIG and GE. AIG issued a statement after it was designated, confirming that it has accepted designation as a systemically important insurer, and is “already working closely” with the Federal Reserve Bank of New York “as our regulator.”