The Financial Stability Oversight Council (FSOC) approved on Tuesday afternoon the criteria it will use for determining whether an insurer is “systemically significant” and thereby suitable for stricter federal regulation. The FSOC unanimously approved the rule, which itself is consistent with the regulation the FSOC proposed in November.
The final regulation establishes a three-step screening process for determining whether a non-bank such as an insurer should be subject to regulation by the Federal Reserve Board as well as state regulators because, under the criteria established under the Dodd-Frank Act, it represents a potential risk to the stability of the U.S. financial system.
Brian Gardner, an analyst for Keefe, Bruyette & Woods, Inc., New York, says the final rule establishes a process in which the second and third steps that will enable the FSOC to narrow down which firms will ultimately designated as posing a potential material risk to the U.S. financial system.
He said the last two stages will be more qualitative than first step. Ultimately, it will be a judgment call as to whether a non-bank poses a material risk to the U.S. financial system.
Gardner cautioned that SIFI designation will be a very long process, and an uncertain one by design. “The SIFI designation “will ultimately not be reduced to simple rules and calculations,” he said.
“This does not provide a lot of clarity in the ultimate determination,” Gardner said, but “it does provide a little clarity as to how process will work.”
He said the Treasury Department is trying to get this process finalized by the end of the year, but it would not be a one-time exercise. This would be a fluid process in which companies could be designated as SIFI and later lose that designation..
Schuman, a life analyst also with Keefe, Bruyette & Woods, said that the first thing he noticed about the final rule is that the Stage 1 screen proposed last fall has been maintained.
“The implications are similar,” Schuman said, but he noted that the final rule provides more detail as to how the FSOC will apply those screens.
He said the final rule also clarified some details about the metrics that will be used, including calculation of derivative liabilities.
Schuman also said that the final rule indicates FSOC examiners will “take an expansive view of defining a company’s debt.”
That means that besides calculating holding company debt, some operating debt will also be involved in the calculations as to potential systemic risk, Schuman said.
A key change in the final rule from the proposal is that it clarifies the applicability of the confidentiality provisions to information collected by the FSOC as part of the determination process.
This was a key request of insurers through the notice-and-comment process prompted by the FSOC’s decision to re-propose the rule last November.