The Financial Stability Oversight Council has determined that Prudential Financial, Inc., will no longer be supervised by the Federal Reserve Board as a systemically important financial institution. The Sept. 19, 2013, decision that financial distress at the company could pose a threat to U.S. financial stability no longer is warranted, the FSOC said.
The Dodd-Frank Act authorizes the FSOC to consider whether nonbank financial companies are SIFIs that should be supervised by the Fed and subject to enhanced prudential standards. A company can be designated a SIFI if:
- material financial distress at the company could pose a threat to U.S. financial stability; or
- the "nature, scope, scale, concentration, interconnectedness, or mix of activities" of the company could pose such a threat.
Prudential’s SIFI designation was based on the first criterion (see Banking and Finance Law Daily, Sept. 20, 2013). In explaining the rescission of that designation, the FSOC said it had been concerned principally about the exposure of creditors, investors, and other market participant to the company and the domino effects on asset values if the company were to need to liquidate assets quickly.
What changed since 2013? The FSOC’s explanation is redacted in ways that conceal some of the council’s reasoning. However, the explanation noted that, compared to 2013:
- The company’s capital market exposures have not significantly changed.
- The company’s exposure to the institutional insurance market does not contribute to a threat to financial stability.
- There was no significant risk that a forced liquidation of assets by Prudential would disrupt the asset markets or threaten companies with comparable holdings.
- The market effect on the company of a downward shock has decreased since 2013 due to the company’s leverage ratio and increased holdings of highly liquid assets.
The FSOC added that the New Jersey insurance regulatory agency has more authority to oversee Prudential than it had in 2013.
The explanation did note, however, that Prudential still qualifies as a company that is predominantly engaged in financial activities. More than 85 percent of both the assets and revenue of the company and its subsidiaries are related to activities that are financial in nature. As a result, the company will remain eligible for a SIFI designation should it pose a systemic risk in the future.
Watt’s concurrence. In agreeing with the FSOC’s decision, Federal Housing Finance Agency Director Melvin L. Watt expressed his concern that the company never was evaluated under the second of the two standards. Congress intended that both criteria should be given equal weight, he said. Prudential qualified for "de-designation" under the second standard as well as the first.
Company statement. Prudential’s press release said the company believes that it never qualified for the SIFI designation. The company’s "sustainable business model, capital strength and comprehensive risk management" meant the company never posed a systemic threat, the company said.
Companies: Prudential Financial, Inc.
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