Risk & Compliance

U.S. Frees Prudential From ‘Too Big to Fail’ Label

The Financial Stability Oversight Council's decision means there are no longer any nonbanks subject to stricter, post-crisis oversight.
Matthew HellerOctober 17, 2018

U.S. regulators said Wednesday they had removed the “too big to fail” designation from Prudential Financial, relieving the insurer from the stricter oversight imposed on nonbanks after the financial crisis.

Prudential was the last of four nonbanks to be operating as a “systemically important financial institution” meriting the tougher scrutiny. The Obama administration had added it to the list of potential threats to the financial system in September 2013 under the 2010 Dodd-Frank reform.

The government’s Financial Stability Oversight Council, a group of market and bank regulators, cited changes at Prudential over the past five years in rescinding its earlier determination that the firm should be subjected to “enhanced prudential standards.”

“The council’s decision today follows extensive engagement with the company and a detailed analysis showing that there is not a significant risk that the company could pose a threat to financial stability,” Treasury Secretary Steven Mnuchin, the council’s chairman, said in a news release.

But critics said the move reflected the Trump administration’s abdication of its regulatory responsibilities.

“Since [2013], Prudential has grown even larger — increasing its assets by more than $100 billion and its derivatives exposures by more than 30 percent,” the Center for American Progress said. “Releasing an $800 billion insurance company from sensible financial stability measures … decreases the resiliency of the U.S. financial system.”

As The New York Times reports, the heightened oversight of nonbanks was in large part a response to the near collapse of A.I.G. in 2008. A.I.G. and GE Capital were released from the regime after slimming down significantly while MetLife successfully fought the systemic designation in court.

Critics of FSOC’s actions under the Obama administration contended that insurance companies were less risky than banks of a similar size because they did not rely on financing that could dry up quickly in a crisis, potentially causing a run on the institution.

“I don’t believe Prudential ever should have had the designation in the first place,” said Jay Gelb, an insurance company analyst at Barclays. “Under any plausible stress scenario, I cannot envision how Prudential would have any type of liquidity challenges.”

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