A key response to the 2008 financial crisis was setting up a super-group of regulators to protect the economy from another disastrous crash. But in the Trump era, flagging new dangers has taken a backseat to cutting constraints on business.
The latest blow came Wednesday when the Financial Stability Oversight Council (FSOC) said it no long considered Prudential Financial Inc. so big and complex that the insurer’s failure could trigger a panic.
Prudential was the last non-bank to carry the regulator’s dreaded systemic-risk label, which brings tough oversight and steep compliance costs. When Congress created FSOC through the Dodd-Frank Act, many on Capitol Hill and Wall Street expected it to impose the tag on a number of hedge funds, private-equity firms and insurers. Instead, the watchdog is retreating.
Since officials picked by President Donald Trump took the reins, the group has been more focused on making it easier for companies to escape the government’s grip than examining whether additional firms should be tapped. With such an agenda, it seems unlikely that any non-bank giants — such as Berkshire Hathaway Inc. or BlackRock Inc. — will be declared systemically important financial institutions anytime soon.
“They made it clear that they didn’t want to designate anyone,” said Marcus Stanley, policy director at Americans for Financial For Financial Reform in Washington.
Despite FSOC’s reluctance, Wall Street retains plenty of systemic-risk labels. That’s because Dodd-Frank automatically slapped JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc. and other huge lenders with aggressive Fed supervision and stiff capital rules.
Yet the hesitancy to subject non-banks to added scrutiny comes at a potentially fraught time. Former Federal Reserve Chair Janet Yellen is among those who have raised concerns that some of the riskiest financing of highly indebted companies is being done outside the traditional banking sector. And private-equity firms have seized an increasing share of the lending market.
FSOC members include the heads of the Treasury Department, Fed and Securities and Exchange Commission. Treasury Secretary Steven Mnuchin, who leads the panel, said in a Wednesday statement that the Prudential decision shows “the council has continued to act decisively to remove any designation that is not warranted.” He added that regulators conducted a detailed analysis verifying that the insurer didn’t pose a “significant risk” to financial stability.
Prudential added that it shouldn’t have been labeled a threat in the first place, issuing a statement that said it “never met the standard for designation.”
Other companies have made similar arguments, claiming the process was opaque, inconsistent and even political.
American International Group Inc., which played a central role in the 2008 crisis, got labeled even though it had shrunk after the meltdown. Additional insurers including Prudential and MetLife Inc. that were bigger than AIG also received the tag. But Warren Buffett’s Berkshire and Blackrock, the world’s largest money manager, didn’t.
Last year, Treasury proposed a road map for overhauling FSOC designations that would make it harder to affix the risk tags.
The plan urged the council to focus on how an entire industry might pose risks, rather than prioritizing the dangers presented by specific firms. Labeling companies as systemically important should only be done if the council was certain a firm was likely to get into trouble. The result: More hurdles for a process that had mostly ground to a halt even during the Obama administration.
Craig Phillips, a top Treasury official, said recently that regulators were working on a way to declare specific business activities — not companies — as risks.
Such an approach is designed to fail because FSOC has no direct method for regulating activities that set off alarms, Stanley of Americans for Financial Reform argued. He called it “an excuse for doing nothing.”
At the height of its muscle-flexing in the years immediately after the 2008 crisis, FSOC placed Prudential and three other financial titans under heightened Fed oversight: AIG, MetLife and General Electric Co.’s finance arm. Asset managers Blackrock and Pacific Investment Management Co. avoided the risk label after aggressively lobbying agency heads appointed by former President Barack Obama.
Starting in 2016, companies began slipping out of FSOC’s grasp, with GE Capital exiting after selling financial assets and MetLife winning a court battle over its designation. Last year, regulators selected by Trump helped let out AIG.
—With assistance from Katherine Chiglinsky and Saleha Mohsin.
— Read Prudential Sheds ‘Too-Big-to-Fail’ Label, But…, on ThinkAdvisor.