Lessons Learned: Stiffer Regulations for AIG, Prudential, & GE Capital
A group of regulators have announced plans for increased federal scrutiny of American International Group, Prudential Financial, and GE Capital, non-bank firms labelled as “systematically Important” that could pose a major threat to market stability if they were to fail.
The Financial Stability Oversight Council (FSOC), which has the authority to designate companies they deem hazardous to the market if they were to fail, has sent notifications to each of the aforementioned companies informing them that they would need to develop plans of action in the event they were to collapse.
“The council took another important step forward by exercising one of its principal authorities to protect taxpayers, reduce risk in the financial system, and promote financial stability,” said Treasury Secretary Jack Lew.
During the financial crisis from 2007-2009, where several major large non-bank firms skirted with insolvency or crumbled completely, the FSOC emerged to extend the Federal Reserve's rule to companies capable of causing a significant negative impact to the market. So far, eight companies have been included, and each company is required to undergo stress tests, comply with capital requirements, and submit living wills for dismantling operations.
Opponents of the FSOC have criticized the group for insufficiently explaining the reasoning behind each companies' designation, amid worries that bringing a company under Federal oversight would only mean access to a bailout by the government.
“Designating a company as 'too big to fail' is bad policy and even worse economics,” said Texas representative Jeb Hensarling, chairman of the House Financial Services Committee. Companies have 30 days to contest a designation by the FSOC, which is already embroiled in several wrongful designation lawsuits.
Representatives from AIG, Prudential, and GE Capital have either declined comment or are preparing to contest a designation.