(Bloomberg) — Prudential Financial Inc., the second-largest U.S. life insurer, was designated systemically important in a 7 to 2 vote, the Financial Stability Oversight Council said today.
Edward DeMarco, acting director of the Federal Housing Finance Agency, and Roy Woodall, a former Kentucky insurance regulator, opposed the designation, the council said in a document explaining the vote. The council, led by Treasury Secretary Jacob J. Lew, initially proposed Prudential’s designation in June by the same margin. The insurer challenged the decision, prompting this week’s affirmation.
“While exposures to Prudential may be small relative to the capital of its individual counterparties, aggregate exposures are significant enough that they could amplify the risk of contagion among other financial institutions if Prudential were to experience material financial distress,” the council said.
Prudential was the first company to challenge an FSOC designation and joins American International Group Inc. and General Electric Co.’s finance unit in being labeled a non-bank systemically important financial institution. Neither AIG nor GE contested the decision. Prudential yesterday disclosed that it lost its appeal, without stating the vote tally.
The Dodd-Frank Act authorized the council to designate companies that it determines could pose a threat to stability if they were to fail, subjecting them to increased oversight. The Federal Reserve can impose tighter capital, leverage and liquidity rules, and demand measures including stress-testing and wind-down plans. Fed Chairman Ben S. Bernanke is also on the FSOC.
“No large financial institution has more than a de minimus amount of its equity capital exposed to Prudential,” DeMarco said in his dissent. The FSOC’s analysis of the Newark, New Jersey-based insurer’s balance sheet “does not fully take account of the stability of Prudential’s liabilities, the quality of its assets, or the strength of its equity capital.”
Woodall, the council’s independent member with insurance expertise, said the FSOC didn’t sufficiently support the conclusion that distress at Prudential could pose a threat to financial stability.
Prudential said yesterday it has 30 days to appeal the designation in federal court. “We are currently reviewing the rationale for the determination and our options,” the insurer said in a statement.
MetLife Inc., the largest U.S. life insurer, has said it’s been moved to the last stage of review to be designated systemically important.
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