The Financial Stability Oversight Council (“FSOC”) announced on October 17, 2018 that it has voted unanimously to rescind the designation of Prudential Financial Inc. (“Prudential”) as a systemically important financial institution (“SIFI”). Prudential is currently the largest life insurance company and the seventh largest insurer and bank holding company in the United States. Due to the size, scope and complexity of its business, it was labeled a SIFI in 2013 and added to the list of nonbanks considered “too big to fail” – those whose collapse the Treasury Department believed could threaten the stability of U.S. financial markets. SIFIs are subject to strict supervision and oversight by the Federal Reserve. Pursuant to the Dodd-Frank Act, the FSOC must annually reevaluate the continued necessity of a SIFI-designation.
The FSOC previously identified three channels through which the negative effects of a SIFI’s distressed finances could be transmitted to the market, including exposure to the SIFI by market participants, asset liquidation, and the inability or unwillingness of the SIFI to carry out critical functions or services. In 2013, the FSOC found the threat posed by Prudential arose primarily from exposure and asset liquidation channels. According to the FSOC’s most recent evaluation, although certain aspects of Prudential’s business and activities have not materially changed since 2013, several factors have significantly affected its previous conclusion that Prudential could cause financial instability if it experienced material financial distress. The factors include actions taken directly by Prudential, such as creating and dissolving captive reinsurance companies and restructuring debt, as well as certain critical regulatory developments and related initiatives by the National Association of Insurance Commissioners.
Notwithstanding the FSOC’s determination, Prudential and eight other insurance companies remain designated as globally significant SIFIs by the International Association of Insurance Supervisors and the Financial Stability Board. Two of these insurers had also been designated as SIFIs under the Dodd-Frank Act, but the labels were since rescinded or otherwise removed.
This post written by Alex Silverman.
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