Prudential Loses Appeal, Is Designated a SIFI by FSOC

Independent member Roy Woodall as well as Federal Housing Finance Agency (FHFA) Chairman Ed DeMarco likely voted against the designation, as they did initially, back on June 3. They likely joined FSOC nonvoting member and state regulatory insurance representative, Missouri Insurance Director John Huff, in rejecting the majority’s opinion that a life insurance company is subject to runs on the bank and contagion that threaten the financial system. FSOC and Treasury did not immediately respond, but the minutes and the rationale will be justified at some future point.

Huff has said publicly that he does not believe that some members of FSOC understand insurance, pointing to the FSOC analysis used for AIG’s life business, which cites runs on the life business, cashing in of policies and the spread of such policyholder panic to other life insurers as cause for marketwide economic instability.

There is legislation pending in Congress that would alleviate the Basel III strictures so they are more tailored to the business of insurance, and as late as Monday, Sens. Sherrod Brown, D-Ohio, and Mike Johanns, R-Neb., wrote to their colleagues asking them to join them in “clarifying the law” to prevent the “bank-centric standards from being applied to insurance and causing serious challenges for them and possibly for their policyholders. The Senators are looking for broad bi-partisan support for their bill, S. 1369, that will fashion Basel III to the long-term asset to long-term liability matching business of insurance, rather than the short-term debt-funding model of banks.

Fed officials have suggested in testimony that a legislative fix is necessary to address this part of Dodd-Frank, known as the Collins Amendment. 

A Treasury spokesperson said back in July that the FSOC “has developed a robust process for evaluating whether a nonbank financial company should be subject to [Fed] and to enhanced prudential standards. Although Treasury and FSOC do not disclose insurers under review, MetLife has acknowledged it is in stage three of SIFI review, and Huff has said other nonbank institutions, a number of them, are also in various stages of review. 

Prudential’s decision was different than AIG and GE. AIG issued a statement after it was designated, confirming that it has accepted designation as a systemically important insurer, and is “already working closely” with the Federal Reserve Bank of New York “as our regulator.”