What Does it Mean to be SIFI?

Life insurers generally do not create high systemic risk in at least several of the categories cited under the proposed regulation, including substitutability, leverage, liquidity risk and maturity mismatch, and existing regulatory scrutiny, Schuman said.

“As a result, we think it’s far from certain that MetLife and Prudential will ultimately be designated as SIFIs,” Schuman said.

He explained that it should also be pointed out that it is unclear what consequences will attach to a SIFI designation for a non-bank financial.

“In the case of insurers, we would think that the FSOC might show significant deference for the existing insurance regulatory capital framework,” Schuman said.

The proposed regulation, which will have a 60-day comment period, establishes five thresholds for preliminary screening of non-bank financial institutions with assets of at least $50 billion.

Companies meeting at least one of the thresholds will be subject to further analysis in a multi-stage process to determine whether they might ultimately be deemed systemically important financial institutions, or SIFI.

The uniform quantitative thresholds the FSOC intends to apply in the first stage of evaluation to identify NFCs requiring further review are if a company has at least $50 billion in total consolidated assets and meets or exceeds any one of the following:

• $30 billion in gross notional credit-default swaps outstanding;
• $3.5 billion in derivative liabilities;
• $20 billion of outstanding loans borrowed and bonds issued;
• 15-to-1 leverage as measured by total consolidated assets to total equity;
• 10% ratio of short-term debt to total consolidated assets.

MetLife falls above the total debt, derivative liabilities and CDS thresholds, while Prudential falls above the mark on total debt and derivative liabilities.

The FSOC said it believes these thresholds will provide “meaningful initial assessments” regarding the likelihood that a NFC could pose a threat to U.S. financial stability; and that thresholds “add significant transparency to the designation process.”