If designation holds, firms will be subject to Fed oversight, stricter control
Prudential Financial Inc. and American International Group Inc. are among the nonbank financial firms that regulators have proposed labeling as big enough to threaten the U.S. financial system, a move that would subject them to stricter regulations.
The Financial Stability Oversight Council voted Monday to make the initial designations, according to a statement from Treasury spokeswoman Suzanne Elio.
The council, which was created by the Dodd-Frank financial reform law, has the power to name financial firms as “systemically important financial institutions” and impose higher capital reserve and other requirements.
The FSOC will not release the names of the companies until a final vote on the systemic determinations but Prudential and AIG both announced their designations. Firms will be given 30 days to appeal, a move that Prudential is mulling.
“The company currently is evaluating whether to request a nonpublic evidentiary hearing before the council to contest the proposed determination, as it is entitled to under the applicable regulations,” Prudential said in a statement.
If Prudential asks for a hearing, the FSOC must hold it within 30 days. After the hearing — or after the deadline passes for a hearing request — the FSOC can finalize the designations by a two-thirds majority vote. The committee is comprised of 15 members, 10 of whom can vote.
Systemically important firms could have their regulatory world upended, with the Federal Reserve becoming their primary overseer.
“It would require a very different regulatory framework than most firms are under now,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc.
Under Fed oversight, companies would be subject to capital requirements that apply to banks. They also would have to meet stronger risk-management, debt-equity and liquidity rules, undergo annual stress tests and create a “living will” for winding down their operations if they fail. The Fed has not yet finalized all the rules for these institutions.
“It will, in many cases, be a significant increase in regulatory requirements,” said Edward Hida, a partner in governance, regulatory and risk strategies at Deloitte & Touche LLP. “It's fairly extensive. It's intended to provide a new level of oversight.”
While the FSOC initially is targeting insurers, it's unclear whether it will extend the systemically important designation to asset managers as well. Mr. Hida said that organization may need to do further rule making, given that the bulk of assets in those firms are client funds.
"It's a different ballgame because the assets in an asset manager are not house money," Mr. Hida said.
Treasury Secretary Jacob Lew, who also is FSOC chairman, called Monday's vote a breakthrough.
“The council has made significant progress over the last two years in making our financial system safer, stronger and more resilient,” Mr. Lew said in a statement. “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.”
Republican Rep. Jeb Hensarling of Texas, chairman of the House Financial Services Committee, criticized the action of the council, arguing that rather than prevent market collapses, the stricter Dodd-Frank rules promote federal Wall Street bailouts.
“Designating any company as ‘too big to fail’ is bad policy and even worse economics,” Mr. Hensarling said. “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.”
