The U.S. Treasury's Financial Stability Oversight Council has rescinded Prudential Financial Inc.'s designation as a company whose failure or "material financial distress" could threaten U.S. financial stability, meaning that the company is no longer subject to the increased scrutiny that designation carries.
The vote to remove the designation was unanimous. The insurer was the only nonbank entity to carry the label after fellow insurers including American International Group Inc.'s and MetLife Inc. shed theirs in recent years. Being classed as posing a threat to financial stability entails supervision by the Federal Reserve Board of Governors and enhanced prudential standards.
The Financial Stability Oversight Council, or FSOC ,said its assessment of Prudential found that a forced asset liquidation by the company would not pose a significant risk of disrupting trading in key markets or causing issues for other firms with similar holdings. It also said the market impact of a downward shock to Prudential's net worth has decreased since 2012, mainly because the company has increased its holdings of highly liquid assets and decreased its leverage ratio.
"The council's decision today follows extensive engagement with the company and a detailed analysis showing that there is not a significant risk that the company could pose a threat to financial stability," Treasury Secretary Steven Mnuchin said.
"The council has continued to act decisively to remove any designation that is not warranted."
Prudential said it welcomed the "appropriate conclusion that Prudential does not pose systemic risk," which it said "affirms our longstanding belief that Prudential never met the standard for designation."
In an opinion published alongside the FSOC's notice and explanation of its decision, Mel Watt, director of the Federal Housing Finance Agency, wrote that he agreed that the determination that Prudential no longer required enhanced supervision under the Dodd-Frank Act provision relating to material distress posing a threat to U.S. financial stability.
However, he said the FSOC has made no independent evaluation of whether the company would qualify under the second standard, which relates to the threat posed by its nature, scope, size, scale, concentration, interconnectedness or mix of activities.
"As I said in my AIG dissent, 'Congress obviously intended for the second standard to be regarded as on equal legal footing with the first standard and understood that it would be possible for a company to be too big to fail even if it passed the test set out in the first standard and was not experiencing financial distress,'" Watt wrote.
"Because I believe Prudential would also qualify for de-designation under the second standard if it were evaluated under that standard, I will vote today to de-designate Prudential."
He added: "However, I believe it is important for me to reiterate ... that I believe FSOC has an obligation to look independently at both standards in the process of deciding whether to designate or to de-[designate] a company."