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“Too big to fail” designations for insurers may become a thing of the past amid a Republican-led effort to eliminate or revise certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, but the impact will be limited as only two insurers are currently tagged with the designation.
A U.S. House Financial Services Committee memo outlining the Financial Choice Act includes, among other things, removing the remaining nonbank systemically important financial institutions references in repealing a Dodd-Frank provision that establishes the process to quickly and efficiently liquidate a large, complex financial company that is close to failing.
“The Choice Act and abolishing the SIFI designation would be a good thing,” said Cynthia Borrelli, a principal and head of the insurance law practice of Bressler, Amery & Ross P.C. in Florham Park, New Jersey. “But would it be a huge impact to the world or at least to the United States? No. How significant would it be to abolish a designation that only impacts two insurers?”
The Financial Stability Oversight Council has the responsibility of evaluating companies and has used it designate four nonbank institutions as SIFIs, including American International Group Inc. and Prudential Insurance Co., but the council inconsistently and arbitrarily exercises this power, according to a House Financial Services Committee report released last week.
“It was a challenging exercise from what we could observe because the bodies doing this were either newer or much more bank-centric so coming up with a way to judge systemic importance of insurance companies and how to assess that wasn’t easy,” said Keith Buckley, global head of insurance for Fitch Ratings Inc. in Chicago. “I think it was something that would naturally be potentially criticized and challenged. And just philosophically, the Republican Party has tended to oppose the concept of SIFIs and the Democratic Party has tended to be more supportive so you also have that political dynamic.”
To date, the impact has been limited to additional compliance costs and reporting for SIFIs, but an enhanced capital standard has not yet been put in place so “there hasn’t been radical changes as far as new, more onerous regulation that the companies have needed to adhere to,” Mr. Buckley said.
AIG CEO Peter Hancock has previously stated that the SIFI designation has “not been a binding constraint” and has called the compliance costs modest.
“If there's a change in the composition of the FSOC, that may change the way the relative importance of SIFI designation is in the eyes of those policymakers,” he said in November 2016. “But for us, it just simply isn't a binding constraint on our capital returns and our objectives. So, we don't spend too much time worrying about it.”
In December 2014, the council voted to designate New York-based MetLife Inc. as a SIFI, but the insurer won a court challenge against the designation in March 2016 after U.S. District Judge Rosemary M. Collyer in the District of Columbia found the FSOC’s SIFI determination “fatally flawed.”
“MetLife beat the government so it would only leave AIG and Prudential,” said Elliott Kroll, a New York-based partner with Arent Fox L.L.P. “It’s kind of hard to argue Prudential is not important to our country because they’re just so much bigger than everybody else and AIG, who knows what AIG is going to be tomorrow. AIG is not the AIG of 10 years ago. I wouldn’t be surprised if AIG comes off the list as it continues to change and spin things off. If it winds up just being Prudential, I don’t see it being much of an issue. And everyone going forward will structure themselves so they won’t be subject to that. That’s what I would do.”
The judge’s decision was being appealed by the Obama administration, but the Trump administration could abandon the appeal, experts said. A spokesman for MetLife said the company is still waiting for a decision to come down from the appeals court.
“I want to see what happens on appeal in the MetLife case because I believe the judge was accurate,” Ms. Borrelli said. “The standards were not clear. The standards are not consistently applied. MetLife has been de-designated. That could change if her decision is overturned on appeal. If it’s not, I think that will signify, maybe not the end to Dodd-Frank with respect to the SIFI designation, but …. there won’t be a lot of credibility.”
It is unclear, given the limited application of the designation to nonbank institutions, how much of a priority removing the designation authority will be, particularly as the overall proposal appears to be taking a backseat to other priorities such as a reform of the National Flood Insurance Program, observers said.
“It’s not easy to change laws like Dodd-Frank,” Mr. Buckley said.
But removing the SIFI designation in the United States does not mean these companies won’t be evaluated as systemic risks, experts said, noting that the Financial Stability Board sponsored by the G20 has its own list of SIFIs at the international level and all three U.S.-based insurers tagged as SIFIs were also on the FSB’s list.
The U.S. House of Representatives passed a bill on Thursday that aims to change the way financial institutions are deemed to be systemic risks.