Prudential Financial no longer needs federal oversight, regulators say
WASHINGTON—The Trump administration took another major step on Wednesday toward softening the regulatory burdens faced by big financial firms, finding that mega insurer Prudential Financial no longer requires strict federal oversight.
The decision is a major victory for Prudential, one of America’s largest insurance companies, which has spent years trying to convince lawmakers and regulators that it didn't deserve to be lumped in with the banks that nearly brought down the U.S. economy a decade ago. The move could save Prudential millions of dollars a year in regulatory costs, industry analysts have said.
"We are pleased with this decision, which affirms our long-standing belief that Prudential never met the standard for" additional government oversight, Prudential said in a statement.
The decision to free Prudential from tougher federal oversight was long expected as the Trump administration steps up its efforts to roll back tough regulations that the White House has said are strangling economic growth. Congress passed sweeping legislation earlier this year weakening a key post-crisis regulatory law and big banks such as JPMorgan Chase and Wells Fargo are now pushing regulators for more relief.
"It is refreshing to see a return to more reasonable regulation," Rep. Blaine Luetkemeyer, R-Missouri, a member of the House Financial Services Committee, who has been critical of post-crisis regulations, said of the decision on Prudential.
Critics have warned that deregulating the financial industry a decade after a massive crisis and amid record banking industry profits is short sighted and could lay the groundwork for problems later. "The financial system is a complex and things can go wrong. We need multiple regulatory controls," said Lawrence White, a business professor at New York University, who has studied financial regulation.
The ruling on Prudential's fate was related to a provision in 2010′s financial reform legislation, known as the Dodd-Frank Act. The law called for tougher oversight of not just traditional banks but all financial firms that could pose a threat to the economy. Many of these firms had traditionally received little federal scrutiny. But after the government's hasty bailout of AIG during the depths of the financial crisis — and the national outrage that followed news of bonuses being awarded to AIG executives afterward — lawmakers called for stricter rules for this portion of the financial industry.
The Obama administration designated four such companies, including Prudential, as a "systemically important financial institution" subject to greater government oversight. The firms had to set aside a bigger financial cushion and operate with other safeguards to protect taxpayers if the businesses ran into financial trouble.
But regulators have begun to scale back those burdens. The Obama administration lifted the designation for General Electric's lending unit after the company shrunk the footprint of its finance business, including selling its credit card unit. Last year, the Trump administration lifted AIG's designation as a "systemically important financial institution" and decided not to fight a lawsuit filed by MetLife, which also wanted to escape the extra scrutiny.
Prudential, which will now largely be regulated by the state of New Jersey, was the last non-bank to carry the dreaded "systemically important financial institution" label. The more than 100-year-old insurance company, which has more than $1 trillion in assets under management, is larger now than it was when it was declared too big to fail by regulators in 2013. At the time, the Obama administration warned that if a rush of customers cancelled their insurance policies, for example, it could bring down the company, similar to a run on a bank.
In its finding on Prudential, the Financial Stability Oversight Council, a group of high-level regulators, acknowledged that the insurer remained large and complex, including operating in 50 states and around the world, making it potentially difficult to wind down in an emergency. But its failure would not be a risk to the U.S. financial system, according to the council's unanimous decision, which also questioned the reasoning of putting the giant insurer under federal oversight five years ago.
A detailed analysis found "there is not a significant risk that [Prudential] could pose a threat to financial stability," Treasury Secretary Steven Mnuchin, head of FSOC, said in a statement. "The Council has continued to act decisively to remove any designation that is not warranted."
The ruling comes as the financial industry and Republicans press regulators to act more quickly toward deregulation, including potentially lowering the amount of capital that big banks must hold to prevent a taxpayer bailout in the event of another crisis. The banking industry has argued that the Obama administration rules are too cumbersome and that they deserve relief.
David Hirschmann of the U.S. Chamber of Commerce, a large lobbying group, praised FSOC's' decision on Prudential and said the panel should now take "expedient action" to tackle other regulatory reforms. "This decision stands as the latest signal of forward progress since 2008," he said in a statement.
Meanwhile, some Democrats and consumer groups say that the financial industry needs more oversight, not less. Earlier this month, Sen. Bernie Sanders (I-Vt.) introduced legislation that would force federal regulators to break up six Wall Street firms — JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — as well as insurance giants such as Prudential Financial and MetLife. Sanders has said his plan — which is dead on arrival with a Republican Congress — would prevent a repeat of the financial crisis.