At its meeting today, the Financial Stability Oversight Council approved a final rule and interpretive guidance on the Council's authority to require supervision and regulation of certain nonbank financial companies, under the Dodd-Frank Act.
With this vote, the Council will begin a three-stage designation process, as proposed in October 2011. In Stage 1, the Council will evaluate the nonbank financial company's size, interconnectedness, leverage, and liquidity risk and maturity mismatch. A nonbank financial company would be subject to review if it meets one or more of the following thresholds:
• $50 billion in total consolidated assets;
• $30 billion in gross notional credit default swaps outstanding for which a nonbank financial company is the reference entity;
• $3.5 billion of derivative liabilities;
• $20 billion in total debt outstanding;
• 15-to-1 leverage ratio of total consolidated assets (excluding separate accounts) to total equity; and
• 10 percent short-term debt ratio of total debt outstanding with a maturity of less than 12 months to total consolidated assets (excluding separate accounts).
In Stage 2, the Council will conduct a comprehensive analysis, using the six-category analytic framework, of the potential for the nonbank financial companies identified in Stage 1 to pose a threat to U.S. financial stability.
If after Stage 2 analysis the Council believes further review is needed, it will give those nonbank financial companies an opportunity to submit materials within a time period (which will be no less than 30 days).
It’s no question that many of the largest insurers in the industry will be designated systemically important financial institutions. The U.S. Department of Treasury contends that the Council, which consists of 10 voting members and non-voting members, is critical in helping to protect the financial system from future crises.
J. Stephen Zielezienski, SVP and general counsel for the American Insurance Association (AIA), reacted to the announcement: “By incorporating risk-related metrics in the process, the final rule reflects improvement over the first proposed rule,” he said. “AIA hopes that the Council will use the designation sparingly and apply it only to the companies that pose a systemic threat to U.S. financial stability.”
The association stands by its original assertion that property/casualty insurers engaged in regulated insurance activities do not pose a threat and should be screened out of the designation process. “As we have stressed all along, AIA believes that if members of the Council correctly incorporate and apply risk-related factors in the final rule, they will conclude that property/casualty insurers are not the types of companies that should be subjected to heightened prudential supervision,” Zielezienski said. “The industry business model, the supporting regulatory architecture, the large number of competitors, and conservative management and investment practices employed in the property/casualty insurance industry help reinforce that conclusion.”
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