Regulators free Prudential from stricter federal oversight

Regulators free Prudential from stricter federal oversight
© Greg Nash

A federal panel has announced that it would release insurance company Prudential Financial from stricter federal oversight under the Dodd-Frank Wall Street reform law.

The Financial Stability Oversight Council (FSOC) said Prudential would no longer be considered a “systemically important financial institution (SIFI)” under Dodd-Frank, freeing the company of onerous capital requirements and disclosures.

FSOC, which includes the heads of all major federal financial regulators, voted unanimously at a Tuesday meeting to strip Prudential's designation as a SIFI. Securities and Exchange Commission (SEC) Chairman Jay Clayton recused himself and deferred his vote to Elad Roisman, the agency's newest Republican commissioner.

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“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 MnuchinSteven MnuchinMajor Russian hacking group linked to ransomware attack on Sinclair: report The Hill's Morning Report - Presented by Alibaba - Biden jumps into frenzied Dem spending talks Former Treasury secretaries tried to resolve debt limit impasse in talks with McConnell, Yellen: report MORE, who chairs the FSOC.

“The Council has continued to act decisively to remove any designation that is not warranted.”

FSOC consists of the heads of the Treasury Department, Federal Reserve Board, SEC, Commodity Futures Trading Commission, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, Federal Housing Finance Agency and National Credit Union Administration.

Prudential’s release from the oversight is a long-sought victory for the insurance company, which was one of four nonbanks deemed systemically important by FSOC after the 2008 financial crisis.

In a statement, the company said it is "pleased with this decision, which affirms our longstanding belief that Prudential never met the standard for designation."

"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."

FSOC, which was created by Dodd-Frank, was charged with identifying and labeling financial firms it deemed large and interconnected enough to trigger a financial panic. The panel in 2013 subjected Prudential, AIG, and GE Capital to stricter regulation under those powers, adding MetLife to the list a year later.

The Federal Reserve issues yearly stress tests to SIFIs and requires them to submit plans on how they’d dismantle upon failure without triggering an economic crisis. Failure to pass the Fed’s exams can lead to severe penalties.

All but Prudential had since been released from SIFI oversight. GE Capital successfully appealed its designation in 2016 after selling off much of its lending and investment operations. The FSOC delisted AIG in 2017 after a massive downsizing, and a federal court struck down Metlife’s designation in 2016 after the company sued the FSOC.

Prudential is one of the largest insurance companies in the U.S., managing more than $1.3 trillion in assets and $3.7 trillion in life insurance policies. Despite its immense size, Prudential has argued since its 2013 designation that it doesn’t engage in risky practices that threaten global financial stability, unlike other firms.

Prudential’s delisting seemed imminent as agency heads aligned with President TrumpDonald TrumpOvernight Defense & National Security — Presented by Boeing — Milley warns of 'Sputnik moment' for China WSJ publishes letter from Trump continuing to allege voter fraud in PA Oath Keeper who was at Capitol on Jan. 6 runs for New Jersey State Assembly MORE’s deregulatory agenda took over FSOC. The Trump administration has rejected the size-oriented approach to financial regulation of nonbanks, arguing in a report last year that stricter rules should be applied to firms based on the riskiness of its business practices.

With Prudential freed from Fed supervision, U.S. regulators no longer subject any nonbank to tougher rules for firms believed to be too big to fail. Advocates for stricter financial rules condemned the release of the final nonbank SIFI and warned of imminent harm.

"That is a tragic dereliction of duty for every American because the next financial crash will happen sooner and be worse than it otherwise would have been," said Dennis Kelleher, president and CEO of Better Markets, a nonprofit supporting strict financial sector regulation.

“Forgetting something from long ago, particularly if it was not experienced directly, might be excusable. Knowingly ignoring clear lessons from just a few years ago is a dereliction of duty that history will judge harshly.”

Updated at 9:31 a.m.