Analysts Weigh in on FSOC ‘Systemically Significant’ Rule

NU Online News Service, April 4, 3:29 a.m. EST

The Financial Stability Oversight Council’s final rule determining whether an insurer is “systemically significant” casts a wider net than expected regarding who will get a closer look, and takes an “expansive view” of defining a company’s debt, analysts say.

The final regulation establishes a three-step screening process for determining whether a non-bank such as an insurer should be subject to regulation by the Federal Reserve Board as well as state regulators because, under the criteria established under the Dodd-Frank Act, it represents a potential risk to the stability of the U.S.financial system.

Jeff Schuman, a Keefe, Bruyette & Woods life-insurance analyst, says the final rule “casts a wider net than we expected, but only for the purpose of who is going to get a closer look.”

Brian Gardner, also a KBW analyst, says the rule will allow the second and third steps of the FSOC's screening process to provide for a “narrowing from a broad universe, which will create something more manageable for the FSOC to consider.”

Ultimately, Gardner says, “it will be a judgment call as to whether a non-bank poses a material risk to the U.S.financial system.”

He cautions that this is “going to be a very long process,” adding that a lot of the uncertainty is by design.

“The SIFI designation will ultimately not be reduced to simple rules and calculations,” Gardner explains.

But he adds that the rule “does provide a little clarity as to how process will work.”

He also calls the process “a fluid exercise, not static,” noting, “Companies first designated could later be undesignated; this will be a dynamic process.”

Schuman says the first thing he noticed about the final rule is that the first stage of the screening process proposed last fall has been maintained, although the final rule provides more detail as to how the FSOC will apply the screens.

He says the final rule also clarifies some details about the metrics that will be used, for example, including calculation of derivative liabilities.

Schuman also says the final rule indicates FSOC examiners will “take an expansive view of defining a company’s debt.”

KBW analysts, he notes, “assumed a simpler definition.” Specifically, he says that in addition to calculating holding-company debt, the FSOC will account for some operating debt as it relates to potential systemic risk.

For a description of the FSOC’s final rule, see here.

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