Prudential Financial on Thursday advanced to the final stage of the government’s process for designation as a non-bank systemically important institution (SIFI), according to several sources.
A Treasury spokesperson said that, “The Financial Stability Oversight Council (FSOC) does not intend to publicly announce the name of any non-bank financial company that is under evaluation before a final determination with respect to such a company.”
Analysts at Washington Analysis said Prudential will likely join American International Group (AIG), MetLife and possibly the Hartford among insurance companies the FSOC is considering designating as SIFIs.
Ryan Schoen and other analysts at Washington Analysis said they expect the FSOC to name the first non-bank SIFIs “in the coming months.”
Other non-banks likely to be considered for designation as SIFIs in the first FSOC action include GE Capital and BlackRock, the analysts said.
Robert DeFillippo, Prudential spokesman, declined to comment. Prudential officials had previously said the firm met the FSOC’s quantitative standards for consideration as a SIFI.
At the same time, DeFillippo said, “We continue to have discussions with regulators to help them understand that insurance companies should not be treated like banks in the regulatory process.”
If designated a SIFI, insurers would have to submit to Federal Reserve Board as well as state supervision. That would include stress tests and tougher standards for capital and liquidity. The U.S. spent, lent or committed as much as $12.8 trillion to bolster financial firms and automakers amid the financial crisis.
Sean Dargan, vice president and senior life insurance analyst at Macquarie Group Ltd., in New York, said that the decision is significant.
He said that if designated a SIFI the company won’t be able to return capital to shareholders in the way that they’ve been accustomed to.
“They will have to submit capital plans of some sort to the Fed,” he said.
Dargan said the concern of insurance companies and investors—and the issue has been weighing on the stocks of the companies involved—is that the Fed would use bank-centric metrics in evaluating insurance companies that would be unfavorable to the industry.
However, he noted that the Fed, in an Oct. 5 rule published in the Federal Register, said that in evaluating non-banks, capital rules would be tailored to the industry in which it operates.
Specifically, the language states:
“With respect to nonbank financial companies, several commenters requested that the Board either further tailor the requirements for nonbank covered companies in the final rule or issue a separate rule for these companies. For example, some commenters requested that the Board develop standards that were “insurance-centric” rather than “bank-centric,” noting that stress test scenarios relevant for bank holding companies would ignore salient risks to insurers, such as the possibility of a natural disaster.  The Board may, by order or regulation, tailor the application of the enhanced standards to nonbank covered companies on an individual basis or by category, as appropriate.
“As noted in the proposal, the Board expects to take into account differences among bank holding companies and nonbank covered companies supervised by the Board when applying enhanced supervisory standards, including stress testing requirements. Following designation by the Council, the Board will assess the business model, capital structure, and risk profile of a designated nonbank financial company to determine how the enhanced prudential standards, including the stress test requirements in this final rule, and the early remediation requirements should apply.”
The FSOC is proceeding under Sec. 113 of the Dodd-Frank financial services reform act. The law establishes a three-stage process for designating a non-bank as SIFI.
Schoen cited the minutes of the Sept. 28 meeting of the FSOC as indicating that “regulators are mindful of possible legal challenges from companies that are designated, and are therefore likely to be extremely deliberate in their selections.”
The minutes indicated that the FSOC spent a lot of time at the Sept. 28 meeting discussing how non-banks should be overseen by the FSOC.
Schoen said the minutes indicated that “there is significant insurance regulation expertise on the FSOC, and that “This reinforces our view that new regulations of insurers are likely to be tailored to their specific risks and business activities.”
The group of insurance experts includes Roy Woodall, independent member with insurance expertise; Michael McRaith, director of the Federal Insurance Office, Department of the Treasury; and John Huff, director, Missouri Department of Insurance.
Besides other Treasury officials who participated in the discussions, among those attending the meeting were staffers from the Missouri, Louisiana and North Carolina insurance departments, according the minutes of the meeting.