In a much anticipated development, the Financial Stability Oversight Council announced on October 17 that it has voted unanimously to rescind the designation of Prudential Financial, Inc., as a systemically important financial institution, meaning it is no longer subject to Federal Reserve supervision. Prudential had been the last remaining non-bank with the SIFI designation, of the four major non-bank firms originally tagged with the label by FSOC. The council was established under Dodd-Frank and charged with broad authorities to identify and monitor excessive risks to the US financial system – but the law allows designated firms to have their status reviewed for de-designation. "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," said Treasury Secretary Steven Mnuchin, who chairs the FSOC, pursuant to Dodd-Frank. "The Council has continued to act decisively to remove any designation that is not warranted," he added. In an October 17 statement issued after FSOC's announcement, Prudential said that the decision "affirms our longstanding belief that Prudential never met the standard for designation." In contrast to the other three firms, whose de-designations followed litigation or corporate restructuring, Prudential achieved its regulatory victory by "working through the FSOC's rigorous review process," as the company described it in its statement.
- While the FSOC development is good news for Prudential, on an industry-wide basis it also represents the likely end of FSOC's use of its authority to label specific non-bank institutions as systemically important. Instead, FSOC – which includes the Fed and eight other financial regulatory agencies, as well as Treasury – is moving toward an "activities-based approach regarding designation, with a greater reliance on identifying changes that can be implemented by primary regulators," according to Craig Phillips, counselor to the Treasury Secretary, in a recent interview with the Clearing House Association, a trade group representing 24 of the world's largest commercial banks.
- In a November 2017 report on FSOC designations that described the council's nonbank designation authority as a "blunt instrument," Treasury called for "a process that emphasizes an activities-based or industry wide approach," with a three-step process to assess and address potential risks to financial stability:
- Step 1: Review potential risks to financial stability from activities and products.
- Step 2: If a potential risk to financial stability is identified, work with relevant regulators to address the risk.
- Step 3: If a company could pose a risk to financial stability, consider designation only after consultation with relevant regulators.
- Representative Blaine Luetkemeyer (R-MO), who has indicated an interest in chairing the House Financial Services Committee in the next Congress if Republicans retain the majority, applauded the decision. "While it is refreshing to see a return to more reasonable regulation, the process for designating both banks and nonbanks as SIFIs continues to be far too arbitrary and lacks any semblance of transparency or logic," Luetkemeyer said. "It's my hope that FSOC reconsiders the designation processes across the board."
- Last month, FSOC removed Zion's Bank's SIFI designation, marking the first time a bank had successfully petitioned the council to end its post-crisis supervision.