American International Group Inc. (AIG) and Prudential Financial Inc. said the Financial Stability Oversight Council has proposed that they be designated as "systemically important financial institutions," and could face additional federal scrutiny.
The Federal Reserve Board would require increased levels of capital and supervision of SIFIs. The companies have 30 days to decide whether or not to contest the decision and can ask for a hearing. The council did not release the names of the companies it is considering, but would go public with the names when the designations are officially made after a second vote.
AIG and Prudential Financial Inc. had previously confirmed that they have reached "Stage 3" of FSOC's review process for non-bank SIFIs candidates.
In a brief statement, AIG confirmed the proposed SIFI designation, but offered no additional comment. Robert Benmosche, AIG president and chief executive officer, said earlier this year the SIFI label could actually be a "big positive" for AIG because it will let state regulators know the Fed has reviewed its liquidity plan and its ability to meet its obligations. Attempts to reach the company for additional comment were not immediately successful.
Prudential "is 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," the company said in a statement. "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."
Assuming the company does contest the ruling and loses, Prudential would also have the option of suing in federal court, said Steven D. Schwartz, a financial analyst with Raymond James.
If Pru was designated as a non-bank SIFI, "something which we have viewed as pretty close to inevitable," the company would be subject to a host of regulatory requirements and potential restrictions, Schwartz said in a report. If the designation occurred on or before Oct. 2, 2013, Prudential would be required to conduct its first company-run stress test using March 31, 2014 data and submit the results to the Federal Reserve by July 5, 2014, Schwartz said. It would then be required to conduct its second company-run stress test, using Sept. 30, 2014 data, and report the results of that test to the Federal Reserve by Jan. 5, 2015. Prudentials first capital plan would be due on January 5, 2015 as well.
J. Stephen Zielezienski, senior vice president and general counsel for the American Insurance Association, said the AIA believes "that property/casualty insurers engaged in regulated insurance activities do not pose a threat to financial stability and therefore should be screened out of the SIFI designation process."
"As we have stressed all along, AIA believes that if members of the council correctly apply risk-related factors, they will conclude that property/casualty insurers are not the types of companies that should be subjected to heightened prudential supervision. The industry business model, the supporting regulatory architecture, the large number of competitors, and conservative management and investment practices employed in the property-casualty insurance industry help reinforce that conclusion," he said in a statement.
Prudential and Metropolitan Life Insurance Co. have opted to tell regulators they don't meet the definition of a SIFI and that the life insurance business does not pose a threat to the nation's financial stability. MetLife meets the criteria for a non-bank SIFI candidate but the insurer has denied that it is being evaluated. In February, federal regulators approved MetLife's plan to deregister as a bank holding company following the sale of its bank to GE Capital. MetLife has acknowledged it sold its bank to avoid being labeled a SIFI.
The question of what defines a "systemically important" company does not stop at the border of the United States. The Financial Stability Board, based in Basel, Switzerland, gave global systemically important financial institution (G-SIFI) designations to 29 banks last year and is considering whether to add non-bank companies to that list. The board is composed of representatives of all G-20 countries and the European Commission.
Prudential confirmed it has submitted information to the Financial Stability Board as part of the non-bank G-SIFI evaluation process.
The way the two systems are set up, it is conceivable that a company could avoid a SIFI designation from the FSOC but still receive a G-SIFI designation from the Financial Stability Board.
In the United States, FSOC can order companies designated as SIFIs to be placed under the Fed's supervision if 85% or more of the company's revenues or assets come from activities covered by the Bank Holding Company Act. The rule allows FSOC to recommend that a company's primary regulator apply heightened regulatory standards to a specific financial activity of practice that is deemed to be risky.
The rule also requires FSOC to examine the relationships non-bank financial companies have with other large companies to determine whether those relationships pose systemic risks to the U.S. financial system. Companies that are determined to be systemically risky must submit reports to the Fed, FSOC and the Federal Deposit Insurance Corp. on the credit exposure to other significant non-bank financial companies and significant bank holding companies. To be deemed "significant," a company must have $50 billion or more in total consolidated assets or have been designated by the FSOC as systemically important.
MetLife chairman and CEO Steven Kandarian has said that the SIFI label could expose the insurer to bank-centric capital and liquidity rules similar to the Basel III framework that would put it at a competitive disadvantage.