FSOC votes to rescind GE Capital's SIFI designation

In a note to investors by Washington Analysis, a Washington-based buy-side investment analytical firm that advises institutional investors, Ryan Schoen played up the political implications. He pointed out that the FSOC statement included comments from Treasury Secretary Jacob Lew that pointed out the decision “demonstrates that the FSOCl’s designation of nonbank financial counterparties is a two-way process.”  Schoen said that this “speaks to much of the criticism of Republican legislators, who often claim that no guidance or roadmap has been provided to designated entities seeking a rescission of a nonbank SIFI designation.”

Schoen acknowledged that Washington Analysis “has long been skeptical of legislative efforts to create a new system for designating institutions as nonbank SIFIs, today’s announcement significantly reduces the urgency of such proposals, such as the bill offered by Rep. Blaine Leutkemeyer, R-Mo.

Leutkemeyer is among a number of right-wing members of the House Financial Services Committee who have repeatedly sought to severely limit federal involvement in insurance regulation. Leutkemeyer and Rep. Jeb Hensarling, R-Texas, chairman of the Financial Services Committee, have held repeated hearings and called to task numerous Obama administration officials over the administration’s initiatives to oversee insurance, including the new fiduciary standard rule.

It also comes against the background of the administration’s filing of an appeal last week of MetLife’s successful challenge in U.S. District Court of MetLife’s designation last year as a non-bank SIFI. The decision leaves only American International Group and Prudential Financial as non-bank SIFIs. Oral arguments in the U.S. Court of Appeals for the D.C. Circuit of the MetLife decision is expected in September or October, and a decision by early next year.

Schoen also discussed the next-step in the designation process. He said that he did not expect the FSOC “to act in the foreseeable future to designate new entities as nonbank SIFIs.”

He did note, however, that the FSOC’s 2016 annual report listed a host of risks to the financial system and serves as a forum for the administration “to paint in broad strokes as it outlines the major regulatory priorities for each of the Council’s member regulators.”

Schoen noted that, “As has been the case for the last few years,” asset managers [BlackRock and Fidelity, among others] were highlighted as areas of systemic risk, “though the Council largely deferred future regulation of the industries to their primary regulators,” i.e, the Securities and Exchange Commission.

The FSOC has also said it will await a final decision in the MetLife case before deciding whether to ask to be de-designated. AIG has not commented on its plans. Moreover, Prudential has noted that the FSOC annually re-determines whether it considers a non-bank a SIFI.

MetLife, however, has also made clear it plans to proceed with a restructuring aimed at de-risking the company because it has acknowledged that even if it wins the current case, the FSOC could still re-designate again after altering the evaluation process if the Appeals Court says it can proceed to re-designate MetLife based on a revised evaluation process that conforms to the intent of Congress.

Related:

FSOC eyes SIFI process revisions

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