AIG, Met and Pru all could be ‘too big to fail’

by R.J. Lehmann on November 9, 2011

MetLife Inc., American International Group, Prudential Financial and possibly Berkshire Hathaway all could be designated as systemically important financial institutions (SIFIs) by the Financial Stability Oversight Council, according to rating agency Moody’s Investors Service.

In its analysis, Moody’s notes that Met, AIG and Pru all meet the empirical thresholds set by the FSOC in its recently reissued proposed rules for designating a nonbank financial company a SIFI. Companies who receive the designation would be subject to heightened prudential oversight by the Federal Reserve Board.

Berkshire Hathaway also appears to meet the objective criteria put forward by the FSOC to screen which companies might be designated, but may not meet the definition of a “financial institution,” since a significant portion of its operations are not financial in nature.

Under the proposed rules promulgated last month, and currently subject to a 60-day comment period, a financial institution would be identified for possible designation if it has at least $50 billion in total consolidated U.S. assets, as well as any of the following criteria:

  • It is the reference entity for more than $30 billion in notional credit default swaps outstanding;
  • It has more than $3.5 billion of net derivatives exposure;
  • It has more than $20 billion of outstanding debt;
  • It has a leverage ratio of greater than 15-to-1; or
  • Its short-term debt is more than 10% of total consolidated assets

Companies flagged in the initial stage would be subject to more extensive and company-specific analysis, including tests of their “resolvability,” before a decision is made on whether they will be designated a SIFI.

Moody’s said receiving the designation would be considered a “credit positive” event, meaning the agency would be likely to assign relatively higher ratings (which would lead to relatively lower borrowing costs in the market) to these insurers tagged as, essentially, too-big-to-fail.

“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,” said Laura Bazer, a Moody’s vice president and senior credit officer, according to Insurance Journal.

National Underwriter reported that former New York State Insurance Superintendent Eric Dinallo, now with the law firm of Debevoise & Plimpton, recently suggested that there were five U.S. insurers who would likely be designated SIFIs, although he did not name which companies those would be.

The G-20 recently released its list of 29 global banking institutions that it will designate as systemically significant, including U.S. banks Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo. An equivalent list for global insurers is due in June 2012.

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