FSOC: Prudential off SIFI List (October 19)

Update 308 — FSOC: Prudential off SIFI List;
Too Big to Fail “Solved” in Shadow Markets?

This Wednesday, the Financial Stability Oversight Council (FSOC) did what many have been expecting for a while and voted to de-designate Prudential, the last of the nonbank systemically important financial institutions (SIFIs). Its decision eliminated from this list all financial firms that don’t take customer deposits — from investment banks, to hedge funds, to private equity firms, to asset management firms, insurance companies, etc.

These subsectors, known as the shadow market, are a long list to exclude from the list.  More on this below.

By the way, FSOC’s 66-page Notice and Explanation of the decision is littered with redactions and asterisks providing incomplete justifications for the decision to de-designate.  I’ve never seen anything like it but it is fit subject for speculation for systemic sages over the weekend.

Have a good one,



Legislative Intent and Nonbank SIFIs

To understand the ramifications of FSOC’s decision, we have to understand the intent of Congress in mandating the designation of nonbank financial institutions as SIFI’s in the first place.  The express statutory purpose of FSOC in designating nonbank institutions is codified under Section 113(a) of the Dodd-Frank Act (DFA) — bold added for emphasis:

The Council … may determine that a U.S. nonbank financial company shall be supervised by the Board of Governors and shall be subject to prudential standards … if the Council determines that material financial distress at the U.S. nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the U.S. nonbank financial company, could pose a threat to the financial stability of the United States.

It is clear in statute that Congress’s original intent in Dodd-Frank was to grant authority to FSOC to designate nonbanks that fit the description above. The decision by FSOC to remove the last remaining nonbank SIFI label seems questionable because:

  • Prudential has arguably become more systemically risky since SIFI-designated

When it was designated in 2013, Prudential had more than $700 billion assets and around $3.5 trillion in life insurance policies under management. Today, the company has grown to around $830 billion in assets and has $3.7 trillion in life insurance policies under management. In fact, its notional derivatives exposures and repurchase agreements have grown by 30 percent since its designation.

Per Section 113(a), Prudential’s “size and scale” has in fact grown since its original designation. Under the current administration, size does not matter—too big to fail in the shadow markets has been solved. Last month, FSOC announced their intention to draft new plans for new “activities-based” regulation of nonbanks that would put the focus not on entities, but on the riskiness of business practices. This sounds reasonable in practice, but in reality this is likely more “tailoring” (read “deregulation”) talk we have heard from Quarles.  

  • FSOC itself concedes that Prudential’s failure would be DFA-level damaging

Prudential’s activities in securities lending and derivatives could cause big problems for counterparties, which could in turn have spillover effects. Additionally, while Prudential and other life insurers are not at risk of a run on the banks in the same way as banking financial institutions, they could experience early withdrawal, representing a considerable cash surrender value. If this action were to happen while the company was experiencing financial distress, this could further weaken the company’s position and, given its size, greatly affect market stability.

Congress, in Section 113(a) of Dodd-Frank, outlined two criteria for a company to to be subject to prudential standards: material financial stress and the nature, size, scope, etc. of the institution. It is clear that these two standards should be considered equally when it comes to assessing the overall risk to the financial system posed by a nonbank entity. If it is still the case that Prudential “could pose a threat to financial stability,” why is FSOC flouting the rules laid out in Dodd-Frank and shirking its regulatory duty?

Rescission Ramifications

This decision is significant, and it essentially puts an end to a key provision laid out in statute under DFA.  There was a time when regulators thought about expanding the list and bringing other nonbank institutions into the fold, such as Sallie Mae, NY Life, Principal Financial Corp., et al, but that effort to focus on too big to fail nonbank entities seems to be at an end.

Prudential will no longer be subject to enhanced prudential standards, like stronger capital and liquidity requirements, stress testing, and living wills.  The $800 billion company will now be regulated by the New Jersey Department of Banking and Insurance, a regulator that is severely understaffed and underprepared to oversee the operations of such a corporate behemoth.  It is also unclear whether Prudential’s subsidiaries outside of New Jersey and overseas will continue to be regulated to the same degree. Not only will Prudential come under far less scrutiny than before but, if caught in the middle of a financial crisis, the firm would not have access to the same Federal Reserve liquidity facilities, nor will it be held to the same degree of capitalization standards a bank equivalent in size must follow.

Nonbank SIFI designation existed for those few large nonbanks, like Bear Stearns and Lehman Brothers, that proved to be too big not to regulate. Designation was a rare exception, not the rule. Formerly designated nonbank SIFIs like AIG and GE Capital drastically shrunk their operations and de-risked to shed their SIFI label.  MetLife challenged its designation in court. Without changing its business model in any significant way, Prudential has been set free to return to the shadows.

On the Money

In 2017, the finance and insurance sectors combined represented 7.5 percent of U.S. gross domestic product. U.S. banks own over $17 trillion in assets and have a combined net income of over $165 billion. Earnings season is in full swing, and the “big four” U.S. banks posted healthy revenue growth and rising profitability, boosted by the tax cuts.  This sector is large and, despite S. 2155, the too big to fail banks are still subject to enhanced prudential standards and oversight.

Like banks, nonbank institutions such as asset managers and insurers play an equally large part in the financial system: total U.S. retirement assets stand at over $28 trillion. If insurance assets and mutual funds are taken into account, this number rises to an eye-popping $50 trillion total assets under management. We now have a situation where there is a regulatory blind spot when it comes to the key players in this sub-sector. Nonbank too big to fail entities simply no longer exist in the eyes of federal regulators, no matter their potential risk exposures and interconnectedness in the overall financial system.

The Line Between Legislating and Regulating

Last November, the Trump Administration requested the revision and overhaul of the process by which FSOC designates financial institutions as systemically important. This call to action is part of a broader move to “tailor” the financial sector both within the margins of DFA legislation and by changing the legislation itself. As the economy continues to improve, rosy-eyed elected representatives and public servants alike are loosening the rules at both the macro- and microscopic ends, through legislation and regulation, respectively.

Interpreting Dodd-Frank:  What’s Next?

The regulatory heads at FSOC and the Trump Administration are hiding under the cloak of statute interpretation to drive an agenda which has resulted in the disappearance of too big to fail in the nonbank sector.  Now that Prudential has shed its SIFI label, the threshold for nonbank SIFI designation is so high that FSOC’s authority in this regard is essentially rendered moot. The advent of post-too big to fail in the shadow markets is a truly disturbing development and if history repeats itself, it’s a decision that could come back to haunt regulatory decision makers.                  

In the coming months, FSOC plans to publish more substance on the details of its proposed shift from targeting nonbank entities themselves, to an activities-based approach to nonbank supervision. Insiders at the Treasury have suggested these details might yet be released this fall, but with staffing constraints and their annual report due by the end of the year, this might be delayed until the start of 2019.

45 thoughts on “FSOC: Prudential off SIFI List (October 19)”

  1. I don’t know whether it’s just me or if everybody else encountering issues with your website.

    It appears as though some of the text within your
    content are running off the screen. Can someone else please provide feedback and let me know if this is happening
    to them too? This could be a issue with my internet browser because I’ve
    had this happen before. Kudos 0mniartist asmr

  2. Hey there! I just wanted to ask if you ever have any trouble with hackers?

    My last blog (wordpress) was hacked and I ended up losing a few months
    of hard work due to no data backup. Do you have any methods to prevent hackers?
    0mniartist asmr

  3. This article is actually a pleasant one it assists new net visitors, who are wishing in favor of blogging.

    0mniartist asmr

  4. You really make it seem really easy along with your presentation but I to find this topic to be actually
    one thing that I think I’d never understand. It seems too
    complex and very vast for me. I’m taking a look ahead for
    your next publish, I’ll attempt to get the dangle of it!

  5. I will right away seize your rss feed as I can’t
    in finding your email subscription hyperlink or newsletter service.
    Do you have any? Kindly let me realize in order that I may just subscribe.


  6. We’re a group of volunteers and starting a new scheme in our community.
    Your web site provided us with valuable information to work on. You have done an impressive job and our whole community will be thankful to you.

  7. Terrific work! That is the type of info that are supposed to be shared around the web.
    Shame on Google for no longer positioning this submit upper!
    Come on over and consult with my site . Thank you =)

  8. These are actually fantastic ideas in on the topic of blogging.

    You have touched some pleasant things here.

    Any way keep up wrinting.

  9. fantastic publish, very informative. I wonder why the opposite specialists of this
    sector don’t realize this. You should proceed your
    writing. I am sure, you’ve a huge readers’ base already!

  10. scoliosis
    I’m not sure why but this site is loading very slow for me.

    Is anyone else having this problem or is it a
    problem on my end? I’ll check back later and see if the
    problem still exists. scoliosis

  11. free dating sites
    Does your site have a contact page? I’m having trouble locating it but, I’d like to send you an e-mail.
    I’ve got some ideas for your blog you might be interested in hearing.

    Either way, great website and I look forward to seeing it grow over
    time. dating sites

  12. hello!,I like your writing so so much! share we communicate
    extra about your article on AOL? I require an expert in this area to
    unravel my problem. Maybe that is you! Taking a look ahead to
    see you.

  13. Aw, this was an incredibly nice post. Finding the time
    and actual effort to create a superb article… but what can I say…
    I hesitate a whole lot and don’t manage to get anything done.

  14. Hi there just wanted to give you a quick heads up. The words in your
    post seem to be running off the screen in Opera. I’m not sure if this
    is a format issue or something to do with browser compatibility but I thought
    I’d post to let you know. The design look great though!

    Hope you get the problem fixed soon. Kudos

  15. You really make it seem so easy together with your presentation however I in finding this matter to be really something that
    I feel I would never understand. It kind of feels too complex
    and very huge for me. I am having a look ahead in your subsequent put
    up, I will attempt to get the dangle of it!

  16. Pingback: best russian free dating sites

  17. I’m not sure where you’re getting your info, but good topic.
    I needs to spend some time learning much more or understanding more.
    Thanks for wonderful info I was looking for this information for my mission.

  18. What’s up to every body, it’s my first pay a
    visit of this webpage; this website carries remarkable and actually good information for visitors.

  19. Aw, this was an exceptionally nice post. Taking the time and actual
    effort to produce a top notch article… but what can I say… I procrastinate a
    whole lot and don’t manage to get anything done.

  20. Pingback: are sweet potatoes keto

  21. Howdy! This blog post couldn’t be written much better! Looking at this post reminds me
    of my previous roommate! He always kept talking about this.
    I will forward this post to him. Fairly certain he’s
    going to have a good read. Many thanks for sharing!

  22. I loved as much as you will receive carried out right here.
    The sketch is attractive, your authored material stylish.
    nonetheless, you command get got an nervousness over that
    you wish be delivering the following. unwell unquestionably come further formerly again since exactly the
    same nearly a lot often inside case you shield this hike.

Leave a Comment

Your email address will not be published. Required fields are marked *