By Dow Jones Business News, September 19, 2013, 05:09:00 PM EDT
By Michael R. Crittenden and Ryan Tracy
WASHINGTON--U.S. regulators rejected Prudential Financial Inc.'s ( PRU ) efforts to avoid being designated as "
systemically important," a label that will subject the insurer to heightened government scrutiny.
The Newark, N.J., life insurer in a regulatory filing on Thursday said the Financial Stability Oversight Council
upheld its decision to place the company on a small list of large, non-bank financial firms considered "systemically
important financial institutions." Prudential had challenged the council's vote earlier this year, arguing in a hearing
with regulators it doesn't pose a broader risk to the financial system.
Prudential joins American International Group Inc. ( AIG ) and General Electric Co. (GE) unit GE Capital in the first
group of nonbank financial firms to receive the designation, which is part of new regulations put in place because of
the financial crisis. The designation will subject the company to tougher capital requirements and greater regulatory
scrutiny. A number of large banks and financial firms have previously been deemed systemically important.
Prudential can either accept the decision or challenge the matter in court. "We are currently reviewing the rationale
for the determination and our options," said Bob DeFillippo, the Prudential's chief communications officer.
The decision to uphold its previous vote was a key test for the oversight council, which was created by the 2010 Dodd-
Frank law. Led by the Treasury Secretary and staffed with the heads of other markets and banking regulators, the council
is working to improve the government's ability to identify and address potential risks to the U.S. financial system.
Prudential's challenge was the first by a firm, and came after two council members dissented against naming the firm
Prudential officials had argued the company doesn't meet the definition of systemically important. Some state
regulators and other insurers have argued that the run-on-the-bank scenario envisioned by federal regulators is unlikely
to spread through an insurer like Prudential. John Huff, who represents state insurance regulators on the council as
director of the Missouri Department of Insurance, has said that during the financial crisis, "the insurance sector did
not suffer a run or the same loss of public confidence experienced by the banking sector."
Prudential was designated earlier this year as one of nine large insurance firms that could pose a risk to the global
financial system. The oversight panel's decision to move ahead with the Prudential designation is likely to be closely
watched by MetLife Inc. (MET), which is in an earlier stage of review.
Federal Reserve Chairman Ben Bernanke, who is a voting member of the council, said Wednesday the Fed would use its
authority to regulate nonbank firms designated as systemically important in a "tailored" way. "We want to design a
regime that is appropriate for the business model of the particular firm," Mr. Bernanke said. The Fed will focus on the
"safety and soundness" of the institution as well as its "practices related to derivatives and other exposures" to risk,
Jaret Seiberg, an analyst with Guggenheim Securities, said the move could prove positive for Prudential so long as the
Fed eases the burden by tailoring its rules to the insurance industry. "We suspect customers will prefer to do business
with an insurer that the government declared to be systemically significant, as the view will be that the government
will keep that firm from failing," Mr. Seiberg said in a research note Wednesday.
Write to Michael R. Crittenden at firstname.lastname@example.org and Ryan Tracy at email@example.com
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