Turning its attention to non-bank
financial institutions, the US federal Financial Stability
Oversight Council (FSOC) has issued proposed guidelines that will
be used to determine whether a company should be classified as a
systemically important financial institution (SIFI) for purposes of
regulation.

The FSOC was established in 2010
specifically to consider which institutions represent systemic
risks to the stability of the economy.

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The starting point for a review of
a non-bank by the FSOC to determine whether it is a SIFI under the
proposed guidelines would be total consolidated global assets of
$50bn for US groups and $50bn of total consolidated US assets for
foreign groups. Other factors that would be considered include:

  • $30bn in gross notional
    credit default swaps outstanding for which the financial company is
    the reference entity;
  • $3.5bn in derivative
    liabilities;
  • $20bn of outstanding loans
    borrowed and bonds issued;
  • Leverage ratio of total
    consolidated assets, excluding separate accounts, to total equity
    of 15 to 1; and
  • A short-term debt ratio of
    debt with a maturity of less than 12 months to total consolidated
    assets of 10%.

Based on these guidelines, ratings
agency Moody’s senior credit officer Laura Bazer has Identified
three US insurers that would qualify as SIFIs. They are American
International Group, MetLife and Prudential Financial.

Insurers that receive the SIFI
designation would likely be subject to additional supervision by
the Board of Governors of the Federal Reserve, noted Bazer.

In addition to the three insurers
identified, Bazer said that Berkshire Hathaway also crosses certain
metric thresholds under the proposed SIFI guidelines. However, she
added that Berkshire Hathaway may not be deemed a “non-bank
financial company” under the Dodd-Frank guidelines and may
therefore not be a candidate for SIFI evaluation.

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Bazer concluded: “In general, we believe that greater regulatory
oversight and more conservative financial and risk management
requirements of these large, highly interconnected global financial
institutions would be credit positive, limiting their ability to
assume outsized risk, and thereby supporting their overall
financial health.”