Washington — The Financial Stability Oversight Council (FSOC) voted today on whether to designate two insurers as systemically important financial institutions (SIFI) in the first-ever vote for nonbank SIFIs under the 2010 Dodd-Frank Act.
The three companies up for a vote were AIG, Prudential Insurance and GE Capital. Treasury does not comment on the companies or publically name them at this stage of the process. However, the companies themselves are free to disclose if they are named.
“As noted in the Council’s interpretive guidance, the Council does not intend to publicly announce the name of any nonbank financial company that is under evaluation before a final determination is made,” stated Treasury Spokesperson Suzanne Elio.
AIG acknowledged late today that it received notice from the U.S. Treasury that the FSOC has made a proposed determination that it is a SIFI institution pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Prudential Financial, confirmed it also received notice of a proposed determination that it should be subject to stricter prudential regulatory standards and supervision by the Board of Governors of the Federal Reserve System.
Prudential is currently evaluating whether to request a nonpublic evidentiary hearing before the Council to contest the proposed determination, as it is entitled to do under the applicable regulations, it stated.
“If the Company is designated by the FSOC as a Covered Company, it could be subject to stricter prudential standards under the Dodd-Frank Act, which may include requirements regarding risk-based capital and leverage, liquidity, stress-testing, overall risk management, resolution plans, early remediation, and credit concentration; and may also include additional standards regarding capital, public disclosure, short-term debt limits, and other related subjects as appropriate,” Prudential advised in a statement.
The ball is now in the companies’ courts, and the clock will begin on a final determination today.
The historic vote could set some insurers on a course where they will be not only regulated by the Federal Reserve, as some thrift holding company insurers already are, but put them in a class separate from their competitors, where different rules and expectations from all stakeholders apply, changing the market, regulatory world and perhaps the products sold from what it has experienced up until now.
The Council is made up of 10 voting members and five nonvoting members. Two of the nonvoting members are insurance-related positions. The third insurance position, the insurance expert confirmed by the Senate, votes along with the chairs of financial services agencies.
Treasury Secretary Jacob J. Lew, the chairperson of the FSOC stated, “The Council has made significant progress over the last two years in making our financial system safer, stronger and more resilient. Today, the Council took another important step forward by exercising one of its principal authorities to protect taxpayers, reduce risk in the financial system, and promote financial stability.”
Once an insurer comes under the SIFI umbrella, it is then subject to enhanced prudential standards from the Federal Reserve, its new regulator. These rules have been proposed but not finalized and insurers have said they are not sure what the capital standards will be under a Fed regime.
The insurers also might be subject to strict Basel III minimum capital requirements unless insurers are able to get a fix for a seemingly intractable part of the Dodd-Frank statute, Section 171, which would apply strict minimum capital requirements for banks upon any nonbank SIFIs.
There are a few scenarios that could play out. All votes pass on two-thirds vote, including the vote of the FSOC chairperson, the Treasury secretary. Lew has testified recently that he plans to get moving on all facets of Dodd-Frank implementation.
If a company does not request a hearing and says it is okay with the designation, the FSOC has 10 days to make a final determination. Thus, if a company responds that it is okay with the SIFI mantle as early as tomorrow, June 4, there could be a final SIFI designation made by June 14, or even before, if FSOC wants to really get down to business.
FSOC members do not have to be present in a room at Treasury to vote.
A company could receive a proposed designation and request a hearing. It must do so within 30 days of today. The FSOC must hold a hearing within 30 days of the request. The FSOC will then have 10 days to make a final determination. Thus, a request for a proposed hearing for June 4 would require a hearing by July 4. A hearing request made July 3 would give FSOC until early August to grant one.
If a company stays silent, the FSOC will make a final determination within 10 days, after the clock runs out on the hearing request time frame of 30 days.
Congress did not stay silent, however. Financial Services Committee Chairman Jeb Hensarling, R-Texas, framed the vote as a referendum on “too big to fail” and taxpayers having to fund another collapse, potentially.
“Today, all because of the Dodd-Frank Act, hardworking taxpayers are at greater risk of being forced to fund yet another Wall Street bailout as their government officially designates more large companies as being ‘too big to fail.’ Designating any company as ‘too big to fail’ is bad policy and even worse economics. It causes erosion of market discipline. It also becomes a self-fulfilling prophecy by giving these firms market advantages over their competitors, helping to make them even bigger and riskier than they otherwise would be.”
Meanwhile, the International Association of Insurance Supervisors (IAIS) is currently reviewing global insurers for designation as global systemically important insurers (GSIIs), and U.S. officials have been trying to coordinate the process so it meshes with the domestic SIFI outcomes. The IAIS is expected to send its list to the G-20′s Financial Stability Board (FSB) this month. The process for determining SIFIs is evergreen – MetLife, which was not in this round because it was recently a bank holding company, could come up for an in-depth Stage 3 review at a later time. Stage 3 reviews of financial companies utilize company information, beyond what is available from public and regulatory sources.
AIG officials said Friday they are preparing for regulation by the Federal Reserve Board in addition to state regulation.
Contrary to the views of most other insurance companies, Robert Benmosche, AIG president and CEO, said, “in a way, we see it as a big positive.”
The comments were linked to the announcement — after the market closed — that the Treasury Department is selling 163,934,426 shares of its AIG common stock at $30.50 per share in a public offering.
AIG issued a simultaneous announcement that it has agreed to purchase 98,360,656 IPO shares at the public offering price of $30.50.
At the same time, Benmosche did not specifically say when Fed regulation would begin, and analysts did not ask him.
That’s because the new IPO is unlikely to trigger immediate Fed regulation.
It was believed that AIG would come under Fed oversight as a SIFI once federal ownership of the company dipped below 50 percent.