October 18, 2013 11:14 pm

Prudential Financial drops opposition to stricter oversight

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Prudential Financial, the US insurer, has dropped its opposition to being designated a “systemically important financial institution”, in a blow to other non-bank financial groups that are trying to stave off additional regulation.

The company on Friday decided not to mount a legal challenge to a ruling last month by the US Financial Stability Oversight Council that could lead to the imposition of extra capital and liquidity requirements.

Other large insurers and fund managers had been watching Prudential’s decision, hoping that a legal challenge would circumscribe FSOC’s power and reduce the likelihood of other companies being designated as Sifis.

Prudential “will continue to work with . . . regulators to develop regulatory standards that take into account the differences between insurance companies and banks, particularly in the use of capital, and that benefit consumers and preserve competition within the insurance industry,” it said.

Prudential’s decision was being watched by fellow life insurer MetLife, which is also being assessed for a possible Sifi designation. That company also believes it does not deserve the Sifi label and plans to challenge the effort, at least through the FSOC process.

Behind MetLife, the asset management industry is being examined by FSOC over whether the failure of the largest fund managers, such as BlackRock and Pimco, might pose a threat to the financial system.

Analysts have been reluctant to quantify the potential hit to Prudential’s return on equity from having to set aside additional capital, until the Fed’s rules are clearer, and Prudential had been angry that the process of identifying systemic importance came before there was clarity on the regulatory requirements that come with such a designation.

Jay Gelb, a Barclays analyst, predicted the Fed may hold off setting new capital rules for non-bank Sifis until apparent contradictions in the Dodd-Frank reform act are ironed out, perhaps requiring action by Congress. The wording of the law both requires the Fed to take into account differences between banks and other Sifis, and to impose the same capital and liquidity rules.

The uncertainty remains a problem for shareholders, however, Mr Gelb said, because Prudential and the other Sifi insurers would be unable to extend share buybacks until capital rules became clear. “[They] may not be subject to stress testing until 2015 . . . Although investors should keep their expectations low for share buybacks (particularly for MetLife and Prudential), it would give these insurers an extra year to organically increase capital levels and prepare for increased oversight.”

When FSOC made its designation in September, the two insurance experts on the council and the acting director of the Federal Housing Finance Agency, Edward DeMarco, disagreed with the body’s move on Prudential.

John Huff, director of the Missouri insurance department and the state insurance expert on the FSOC, said in his dissent that “there appears to be a lack of recognition given to the nature of the insurance business and the authorities and tools available to insurance regulators.” He added that applying banking standards renders “the rationale for designation flawed, insufficient, and unsupportable.”

Roy Woodall, the independent member on the council with insurance expertise, said the FSOC’s assessment was not supported by facts or experience. “The underlying analysis utilises scenarios that are antithetical to a fundamental and seasoned understanding of the business of insurance, the insurance regulatory environment, and the state insurance company resolution and guaranty fund systems,” he said.

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