By Peter Schroeder - 07/07/13 10:00 AM EDT
A major insurance company is battling a government-imposed title that Republicans contend would grace it with the “too big to fail” label.
Prudential Financial announced earlier this week that it was appealing a decision from federal financial regulators to designate it as a “systemically important financial institution,” or SIFI.
But in appealing the decision, Prudential is trying to scrap a label that Republicans argue offers a host of perks, including the implicit backing of the United States government.
While the Obama administration contends the Dodd-Frank financial reform law eliminates bailouts, GOP critics of the law argue it does the exact opposite, and makes bailouts the explicit law of the land.
A central tenet of GOP attacks on the Wall Street overhaul is the so-called SIFI designation. While regulators contend the measure subjects big banks and other influential firms to heightened oversight and further restrictions, Republicans liken it to a seal of approval from the government, and a promise for future bailouts if disaster strikes.
House Financial Services Committee Chairman Jeb Hensarling (R-Texas) continued this line of attack, arguing at a hearing that Dodd-Frank makes “too big to fail” the letter of the law.
“Dodd-Frank not only fails to end ‘too big to fail’ and its attendant taxpayer bailouts, it actually codifies them into law,” he said, citing the section that establishes SIFIs.
Richard Fisher, head of the Federal Reserve Bank of Dallas and a vocal critic of ‘too big to fail’ banks, agreed at the same hearing, likening a SIFI designation to being associated with a top-shelf brand.
“There is a substantial advantage to these institutions,” he said. “That’s like saying, ‘I bought it at Neiman Marcus.’”
But financial institutions like Prudential do not appear to agree, lobbying to avoid the designation and the heightened scrutiny that comes with it. Business groups, including the U.S. Chamber of Commerce, have pressured regulators to slow-walk implementation of that Dodd-Frank provision and pushed for a narrow definition.
Meanwhile, Wall Street reform advocates have pushed regulators to adopt as broad a definition as possible, applying the additional oversight to as many firms as possible.
Sheila Bair, the former head of the Federal Deposit Insurance Corporation, argued in June that the SIFI designation is more headache than ego boost.
“This designation is not a badge of honor but a scarlet letter,” she said.
FSOC members finalized their plans to identify key financial institutions for designation back in April of 2012. Under that process, regulators would initially scan the marketplace for SIFI candidates, based on firms that are over $50 billion in size, and also show symptoms that could make them susceptible to market shocks like the 2008 meltdown. Other factors under consideration include extensive leverage, heavy investments in derivatives or credit-default swaps, or an outsized amount of short-term debt in a portfolio.
Banks are automatically sorted for SIFI designation based simply on size — a bank with over $50 billion in assets is a SIFI.
But regulators also made clear in their plans that they have the ultimate say in what firms merit a closer look, including language that states the FSOC has the right to consider any company it wants “irrespective of whether such company meets the thresholds,” and is free to consider any other risk factors it so chooses.
Once an initial pile of candidates had been culled, regulators set about reviewing each candidate individually, at which point it would notify firms that it wanted to designate.
Regulators have yet to finalize exactly what restrictions will come with a SIFI designation.
So far, Prudential, American International Group (AIG), and General Electric have been the only firms to disclose they are facing the label, and Prudential the only one to announce it is challenging the designation via the appeals process also agreed to by regulators.