On June 3rd, the Financial Stability Oversight Council ("Council") met in a closed session and voted to provide written notice to three major US nonbank financial companies ("NFCs") of the Council’s proposal to deem them as systemically important. If the Council makes this proposed determination final, and we fully expect it will, the NFCs would be subject to supervision by the Federal Reserve Board and to prudential standards under the Dodd-Frank Act. American International Group, Prudential Financial and GE Capital immediately disclosed that they were the NFCs which received these proposed determinations.
In our view, the most noteworthy takeaways here center on the proposed designation of Prudential Financial – a large global insurance company that did not receive any governmental assistance during the financial crisis. As a result, we believe at least one more insurance firm will be proposed for designation by early 2014, and the odds of the asset management industry suffering the same fate as insurance (with a few large asset managers being proposed for designation) have gone from 50-50 to a very strong likelihood. The only open question is how quickly this will occur.
This FS Regulatory Brief provides (a) the regulatory backdrop that got us to this point, (b) the next steps the NFCs proposed for designation may take, (c) the prudential standards that will apply if the Council makes a final determination that they are systemically important, (d) the areas of greatest challenge for these firms in the near-term, and (e) our view as to what the Council’s action portends for future NFCs.