NU Online News Service, Oct. 11, 6:48 p.m.EDT

The Financial Stability Oversight Council (FSCOC)—which cameunder intense pressure from insurers and their supporters inCongress to be more specific in disclosing the qualitative andquantitative standards that will be used in determining whether aninstitution is systemically significant—released today a much moredetailed proposal for designating non-bank companies as “SiFi.”

The proposal, approved for public comment by the FSOC, wasdescribed as “proposed interpretive guidance,” by Lance Auer, astaff official at the Federal Deposit Insurance Corp. who helpeddraft the proposal.

Under Dodd-Frank, if an insurer were to be designated as SiFi,it would be regulated by the Federal Reserve Board, which willestablish the “prudential standards” the non-bank SIFIs must adhereto. The SiFi would have to register with the Fed within six monthsand would be subject to additional capital standards as well asother requirements.

The process, if approved after an extensive public commentperiod, will be as follows:

*The FSOC will make each decision on a firm-specific basis, withthe analysis encompassing both quantitative analysis andqualitative judgment.

* It will assess the potential impact of a company's financialdistress on the broader economy based on size, substitutability andinterconnectedness.

* It will assess the vulnerability of a company to financialdistress based on leverage, liquidity risk and maturity mismatch,and existing regulatory scrutiny.

A three-stage process will be used to determine whether anon-bank such as an insurer will be designated:

1) Application of a uniform quantitative threshold (seedetails below) for identifying a non-bank financial company (NFC)that warrants further review.

2) An analysis of the NFCs identified in stage 1,based on available public and regulatory information.

3) Contacting individual NFCs that warrant further reviewto collect data not available in the earlier stages.

At the end of the third stage, the FSOC will hold a vote. Atleast two-thirds of voting members, including the chairperson, mustvote in the affirmative for an NFC to be designated. Adesignated company may request a hearing, after which the FSOCmust again vote by a two-thirds majority for designation.

The uniform quantitative thresholds the FSOC intends to apply inthe first stage of evaluation to identify NFCs requiring furtherreview are if a company has at least $50 billion in totalconsolidated assets and meets or exceeds any one of thefollowing:

• $30 billion in gross notional credit-default swapsoutstanding;
• $3.5 billion in derivative liabilities;
• $20 billion of outstanding loans borrowed and bondsissued;
• 15-to-1 leverage as measured by total consolidated assets tototal equity;
• 10-percent ratio of short-term debt to total consolidatedassets

The FSOC said it believes these thresholds will provide“meaningful initial assessments” regarding the likelihood that aNFC could pose a threat to U.S. financial stability; and thatthresholds “add significant transparency to the designationprocess.”

In a note issued Oct. 11, Fitch Ratings said the clarificationof the SIFI criteria would potentially be “significant” indifferentiating the credit profiles of certain large insurers,particularly with respect to capital requirements and higheroperating costs linked to tougher regulatory compliancerequirements.

“While stronger capital ratios would in and of themselvesrepresent a credit positive, they could also impose higher costsassociated with carrying statutory capital,” Fitch Ratingssaid.

The potential need to carry higher capital against the same riskexposures could make an insurance company designated a SIFI lesscompetitive than its non-SIFI peers, the statement said.

Currently, most large U.S. insurance organizations holdsignificant excess capital relative to statutory minimums, theFitch statement said. “Therefore, the implementation of highercapitals standards may not be a major disadvantage from a practicalperspective in the near term,” the report said.

In proposing the regulation, Treasury Secretary Timothy Geithnersaid subjecting financial firms outside “the formal banking system”should help ease “tension and trauma” created by the near failureof AIG, which was found in September 2008 to have issued $2.77trillion in credit default swaps as insurance against losses onmortgage-backed securities.

The government, by its own account, provided AIG up to $120billion in borrowing authority to save it from insolvency.

But insurers have argued AIG is unique and that their businessmodel should not subject them to federal oversight in addition toits current state regulation.

In a comment letter urging caution in designating insurers asSIFI, for example, the American Insurance Association asked theFSOC to consider its industry “unique and fundamentally differentthan banking and other financial services.”

For its part, the National Association of Mutual InsuranceCompanies (NAMIC) had this to say: “NAMIC appreciates the work theFSOC has done to provide more transparency and clarity to theSIFI-designation process for non-bank financialinstitutions.

“While a clear statement that the FSOC did not intend to look atproperty/casualty insurers would have been preferable, we believeany analysis based on the proposed six-category framework forassessing both a company's vulnerability to financial distress andits potential impact on the broader economy will conclude that noP&C insurance company should be designated as a systemicallysignificant financial institution.

“NAMIC has consistently argued,” the associationcontinued, ”that no P&C insurer engaged in the traditionalbusiness of insurance poses a systemic risk to theeconomy. Subjecting an insurer to enhanced prudentialstandards established by the Federal Reserve's Board of Governors,which has little to no institutional knowledge or experience inregulating insurance, could create unintended market distortionsthat would ultimately harm consumers.”

In the proposal released today, the FSOC noted, “In the recentfinancial crisis, financial distress at certain non-bank financialcompanies contributed to a broad seizing up of financial markets.These non-bank companies were not subject to the type of regulationand consolidated supervision applied to bank holding companies, norwere there effective mechanism in place to resolve the largest andmost interconnected of these non-bank companies without causingfurther instability.”