Treasury Erases ‘Too-Big-to-Fail’ Label on Prudential

By | October 18, 2018

The Trump Administration has rescinded the systemically risky – or “too big to fail” – designation for Prudential Financial that placed the financial services giant under extra regulatory scrutiny.

The designation of Prudential as a systemically important financial institution (SIFI) and a threat to U.S. financial stability was made under the Obama administration, which also tagged two other insurers, MetLife and American International Group (AIG), with the SIFI.

The Trump Administration has indicated it is moving away from identifying specific companies that might pose a systemic risk in favor of focusing on broader risks facing the financial system. The deciding body, the Financial Stability Oversight Council (FSOC), under the Trump Treasury Department lifted the SIFI label on AIG in 2017 and on MetLife in January of this year.

The only other nonbank to be so designated as too big to fail, GE Capital, restructured and had the SIFI label removed in 2016.

A nonbank labeled with the SIFI designation is subject to supervision by the Federal Reserve and must meet enhanced prudential standards.

“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,” said Treasury Secretary Steven T. Mnuchin. “The Council has continued to act decisively to remove any designation that is not warranted.”

The FSOC approved the rescission of Prudential’s designation unanimously. Securities and Exchange Commission (SEC) Chairman Jay Clayton was recused from this matter and delegated his voting authority to SEC Commissioner Elad Roisman.

“We are pleased with this decision, which affirms our longstanding belief that Prudential never met the standard for designation,” Prudential said in a statement. “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.”

The company also said it “will continue to work with regulators to improve and strengthen the FSOC’s processes and other measures to help address potential risks to financial stability.”

Standard & Poor’s said it viewed the designation as “mostly symbolic in nature” and it has no effect on its ratings. “The termination of the designation also has no impact on our view of credit quality of the insurer, and we continue to expect PRU to hold very strong business and financial risk profiles that support the ratings,” the ratings agency said in a statement.

The liberal Center for American Progress criticized the lifting of the designation, claiming the Trump Administration, noting that Prudential has grown even larger since it was first designated as a systemic risk. “Under Secretary Mnuchin’s watch, the number of nonbank financial companies facing enhanced scrutiny has dwindled to zero. If another such company triggers or aggravates the next financial crisis, decisions such as this will be to blame,” said Gregg Gelzinis, research associate at the center.

The National Association of Insurance Commissioners (NAIC), which has argued that the SIFI designation process as applied to Prudential was flawed, applauded the vote.

“This action reflects a greater appreciation of the state insurance regulatory regime and enhancements made to our group supervisory tools,” said Julie Mix McPeak, NAIC president and Tennessee commissioner of insurance. She said it also recognizes the work of the New Jersey Department of Banking and Insurance, as Prudential’s group-wide supervisor, to “implement those tools and apply them to its regulation of Prudential.”

Established by the passage of the Dodd-Frank Wall Street Protection and Consumer Protection Act in 2010, the FSOC’s job is to identify systemic risks to the financial system. It brings together regulators from different financial services industries; however, the state insurance commissioner representative to the FSOC is not a voting member.

“The rationale justifying the de-designation reflects a revised analytical approach that is consistent with the insurance business model and its regulation,” said Eric A. Cioppa, NAIC president-elect who is Maine’s insurance regulator and the insurance representative on the FSOC. “My predecessors have done an excellent job educating the Council on how insurance is regulated and the tools state insurance departments employ to address any potential risks.’

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the FSOC to reevaluate its nonbank financial company determinations at least annually.

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