The Federal Reserve Board announced Wednesday its approval of a final rule that defines the terms “significant nonbank financial company” and “significant bank holding company,” potentially clearing the way for the Financial Stability Oversight Council (FSOC) to designate an insurance company for consolidated supervision by the Fed.
The board also established the requirements for determining when a company is “predominantly engaged in financial activities.”
The final rule cleaves closely to the proposal developed under Dodd-Frank Act parameters and factors that FSOC must consider when determining whether to designate a nonbank financial company for consolidated supervision. FSOC takes a close look at the extent and nature of the company’s transactions as well as interconnectedness with other significant nonbank financial companies and significant bank holding companies.
Consistent with the proposal, a firm will be considered significant if it has $50 billion or more in total consolidated assets or has been designated by the FSOC as systemically important. Among insurers, Prudential Financial and AIG are under consideration by FSOC, which is headed by the Treasury Secretary, as nonbank systemically important financial institutions.
MetLife shed its bank and is only eligible for consideration as a nonbank SIFI (it was never a bank SIFI), given its size, but it says it has not yet been contacted by FSOC, so it has not furnished proprietary, nonpublic information. It does meet the $50 billion threshold.
Prudential and AIG are in the so-called Stage 3 process and there will be a private period where insurers will discuss the proposed designation, if any, before the Treasury makes any designation public.
The uniform quantitative thresholds the FSOC intends to apply in the first stage of evaluation or 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 percent 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.
An exception from the first Fed proposal is that the final Fed rule states that engaging in physically settled derivatives transactions generally will not be considered a financial activity, a change from the proposal.
The FSOC is meeting privately today but a summary won’t be available until later. The final rules are effective May 6.
If and when designated, those nonbank financial companies, including the insurers among them, will be subject to stricter capital rules and be required to have additional capital buffers, undergo stress tests same as banks that could hamper share buybacks or capital-raising strategies, as MetLife experienced, file quarterly credit-exposure reports, and create well-developed plans that outline an orderly recovery and resolution plan if they do face failure.
Nonbank SIFIs will also be required to submit reports to the Federal Reserve, the FSOC and the FDIC on the company’s credit exposure to other significant nonbank financial companies and significant bank holding companies as well as the credit exposure of such significant entities to the company.
“Meeting the additional people, data, technology, time and capital demands required of SIFIs is likely to be expensive,” stated an early report by Deloitte on SIFIs. “On the plus side, there could be possible funding- and borrowing-cost advantages that come from being viewed as too big to fail. This perception of greater strength could make a company more attractive to investors, customers, business partners and counterparties,” stated the report, “SIFI: Whether in or out, start preparing now.”
There is the much-touted idea of the need for a so-called “SIFI surcharge” of perhaps 2.5 percent points on top of common equity capital requirements of 7 percent, Deloitte repeated.