Prudential, the last nonbank SIFI, sheds the label
WASHINGTON — The Financial Stability Oversight Council announced Wednesday that it had voted unanimously to remove Prudential’s label as a systemically important financial institution — the culmination of almost a decade of fierce debate about how regulators should address the risk of nonbank financial firms.
The dedesignation of the insurance giant means that no nonbank currently has the SIFI label. The FSOC’s primary authority under the Dodd-Frank Act is the ability to designate both financial activities and individual institutions as systemically risky, and therefore subject them to enhanced prudential standards such as higher capital, liquidity and reporting requirements.
But the dilution of that power now marks a stunning reversal.
Within the first few years of the establishment of the FSOC, four giant nonbank firms had been designated. The first three were GE Capital, American International Group and Prudential. AIG and GE Capital both took federal bailout money during the financial crisis. Prudential avoided taking government assistance through a stock sale, as did MetLife — the last nonbank of the four to be designated as a SIFI.
But the FSOC’s designation of individual firms — even firms that the crisis clearly revealed to be risky — met with intense skepticism from some lawmakers. Former Rep. Scott Garrett, R-N.J., was a vocal critic of the FSOC and its procedures for designating firms as nonbank SIFIs. And the Treasury said last month that it was planning to unveil a new process for designating nonbank activities instead of individual firms — an approach that former Federal Reserve Board Gov. Daniel Tarullo also suggested might be advantageous as early as 2015.
Dodd-Frank allows designated firms to take steps to lower their risk and be reviewed for dedesignation. The first nonbank SIFI to have the label removed was GE Capital — in June 2016. The election of Donald Trump virtually assured that the remaining nonbank SIFIs — including Prudential — would lose their designation sooner or later.
“The Council’s decision today follows extensive engagement with the company and a detailed analysis showing that there is not a significant risk that the company could pose a threat to financial stability,” Treasury Secretary Steven Mnuchin said in a press release. “The Council has continued to act decisively to remove any designation that is not warranted.”
In its own statement, Prudential said it was "pleased with the decision, which affirms our longstanding belief that Prudential never met the standard for the designation."
"This outcome reflects Prudential’s sustainable business model, capital strength and comprehensive risk management, which have and continue to enable us to fulfill our promises to our customers, deliver consistent performance and meet regulatory obligations," it said.
But some reform advocates argue that the oversight council's move is a mistake that will come back to haunt the financial system.
"That is a tragic dereliction of duty for every American because the next financial crash will happen sooner and be worse than it otherwise would have been," said Dennis Kelleher, president and CEO of Better Markets. "The FSOC’s actions will revive the shadow banking system by recreating the two-tier regulatory system which will incentivize the migration of risk from the higher regulated banking system to the unregulated shadow banking system. That is exactly what was done in the early 2000s, which directly lead to the catastrophic 2008 financial crash and economic crisis."
Prudential's path was somewhat different than other firms that shed the SIFI label.
In the case of MetLife, the Trump administration dropped an Obama-era appeal of a court ruling that had struck down the insurer’s designation. After the 2014 designation of MetLife, over the firm’s vigorous protest, the company sued the FSOC in federal court and won, with the judge deciding that FSOC had erred by failing to establish the firm’s actual — rather than theoretical — potential for insolvency.
GE Capital, meanwhile, opted to break itself up, selling off its online deposits and winning de-designation in June 2016. AIG also restructured itself and was dedesignated last September. Even MetLife restructured itself, in January 2016, in part because of its concerns about the regulatory environment.