FSOC Issues Proposed Rule on Systemically Important Non-Bank Financial Companies

Proposed guidelines for determining whether non-bank financial companies are "systemically important" under Dodd-Frank have been released, and the potential impact on the insurance industry may be less than previously feared.
The Financial Stability Oversight Council ("FSOC") recently released proposed guidelines for determining whether non-bank financial institutions, including insurance companies, should be deemed "systemically important" under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Despite concerns that FSOC could impose federal regulatory oversight on insurers and other non-bank entities that are traditionally state regulated, the proposed criteria seem to limit the potential impact on insurers.

The proposed criteria seem to limit the potential impact on insurers.
The designation of Non-bank Systemically Important Financial Institutions ("SIFIs") under Dodd- Frank is essentially a three-step process under the proposed FSOC rules.[1]

The trigger for detailed review by FSOC under the proposed rules is an entity that has at least $50 billion in total consolidated assets and that meets or exceeds one or more of the following thresholds:
  • $30 billion in gross notional credit default swaps outstanding for which the nonbank financial company is the reference entity;
  • $3.5 billion in derivative liabilities;
  • $20 billion of outstanding loans borrowed and bonds issued;
  • Leverage ratio of total consolidated assets (excluding separate accounts) to total equity of 15 to 1; and
  • Short-term debt ratio of debt with a maturity of less than twelve (12) months to total consolidated assets (less separate accounts) of ten percent (10%).
Once a detailed review of a non-bank financial entity by FSOC is triggered, the second step of analysis is a detailed internal review of the entity based on information from public and regulatory sources.[2]

The third phase of the evaluation under the proposed rules involves FSOC requesting additional information directly from the subject non-bank financial company.

If the FSOC determines that a systemically important designation is appropriate, the entity is afforded an opportunity to object.
Finally, if the FSOC determines that a systemically important designation is appropriate, the entity is afforded an opportunity to object to that determination with written reasons. Thereafter, FSOC votes on the systematically important designation. After the vote, the subject company may request a hearing as well as an additional vote of the FSOC after the hearing.[3]

Insurance industry insiders are welcoming the proposed rule, encouraged by the fact that size alone is not the sole factor in determining systematic risk. According to an article by Business Insurance, J. Stephen Zielezienski, senior vice president and general counsel of the American Insurance Association had this to say:
This guidance suggested that while size is a required threshold at Stage 1, it is not the sole factor for that screening process…

I think Stage 1 provides quantifiable metrics that should help all nonbank financial companies determine whether or not they will be screened out of the designation process at Stage 1.
Ben McKay, senior vice president in the Property Casualty Insurers Association of America also welcomed the proposed rules as good news, according to Business Insurance. However, McKay suggested that the proposed rules should also include cyclicality as a criterion, noting that insurance companies tend to have sources of income that are more steady than the rise and fall of the stock market and therefore the economic downturns that can affect other financial institutions may have less impact on the insurance industry. [4]

The proposed rule is available in PDF form here.

1United States: FSOC Clarifies SIFI Designation Process; Mondaq; October 16, 2011; Kara Baysinger, Mike Zolandz, John Finston and Jerome Walker.
2United States…; Id.
3United States…; Id.
4 Property/casualty insurers may dodge FSOC scrutiny; Business Insurance; October 16, 2011; Mark A. Hofmann.

1 comment:

  1. While this second version of the Proposed Rule provides far greater detail, the process remains extremely complex. Due to authorities still rethinking on what's really best for the proposal.