The Authority of the FSOC and the FSB to Designate SIFIs: Implications for the Regulation of Insurers in the United States after the Prudential Decision

Abstract

The Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Act, has the extraordinary authority to designate financial firms as systemically important financial institutions (SIFIs). Firms so designated are then turned over to the Fed for “stringent” regulation. FSOC’s recent designation of Prudential Financial as a SIFI shows that the agency is unlikely to set any standards that might limit its own discretion, raising the possibility that other insurers will also be designated in the future. Moreover, the US Treasury and the Federal Reserve are both members of an international regulatory group, the Financial Stability Board (FSB) that has been empowered by the G20 leaders to reform the international financial system in the wake of the 2008 financial crisis. The FSB has also taken it upon itself to designate global SIFIs, including three US insurers — AIG, Prudential and MetLife — and has done so with the concurrence of the US Treasury and the Fed. The FSOC just followed the FSB’s lead. This, together with the absence of any standards for what constitutes a SIFI, suggests that if the FSB continues to designate other insurers in the future the FSOC will follow suit. This will have major effects on competition in the insurance industry in the future.

Keywords: Financial Stability Oversight Council, Dodd-Frank Act, Insurance Regulation, SIFI, G-SII, International Association of Insurance Supervisors, Financial Stability Board

JEL Classification: G22, G28, F3, F5