The Financial Stability Oversight Council unanimously rescinded Prudential’s designation as a “systemically important financial institution,” a label that comes with tighter scrutiny from the Federal Reserve.
The move left zero nonbank firms wearing the “systemic” tag, a signal that the Trump administration doesn’t see the need for heightened regulation of large firms outside the banking sector.
It means the Newark, N.J.-based insurer and asset manager will potentially save tens of millions of dollars in regulatory costs. Fed examiners, present in Prudential’s offices since it was initially designated in 2013, will likely vacate the premises immediately, leaving New Jersey state supervisors with primary responsibility for overseeing the firm’s global operations.
“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,” U.S. Treasury Secretary Steven Mnuchin said in a statement Wednesday.
Prudential said it is “pleased with this decision, which affirms our longstanding belief that Prudential never met the standard for designation.”
The oversight council was created by the Dodd-Frank law to avoid a repeat of the 2008 global financial crisis, when taxpayers bailed out large firms outside the banking sector. It empowered regulators to designate for stricter rules nonbank firms, including insurers who had historically been state-regulated.
Regulators under the Obama administration applied the systemic label to four nonbank firms— American International Group Inc., General Electric Co. financing arm GE Capital, MetLife Inc. and Prudential.
The government removed federal oversight of AIG and GE Capital after the firms made significant business-model changes.
MetLife persuaded a federal judge to overturn its designation in 2016, but it made changes as well: It divested about a fifth of its operations through a spinoff of what became Brighthouse Financial Inc., citing both strategic and regulatory reasons. The spinoff contains products, such as lifetime income guarantees, that were expected to be subject to some of the highest federal capital requirements.
Prudential is bigger than it was in 2013. When insurers are ranked by assets, the convention is to include only those they own, not money managed for clients. As of June 30, Prudential’s own assets tallied $819.86 billion, compared with MetLife’s $706.33 billion and AIG’s $496.83 billion.
Prudential’s market capitalization currently is about $41 billion, just below the roughly $44 billion apiece for AIG and MetLife.
After being designated for stricter oversight in 2013, Prudential took the view that it could handle the additional regulation with the collection of businesses it had crafted over the past couple of decades.
Prudential’s diversity means that Fed regulation might have been less onerous for it overall than some peers. Some of its operations, such as asset management, would have felt less of an impact than other parts, such as selling retirement-income annuities with lifetime income guarantees.
Tough new capital regulations that could have hurt that business were considered by the Fed but never completed.
In its appeal to regulators, Prudential planned to reprise previous arguments that it never posed a major threat to financial stability in the first place, people familiar with its thinking have said.