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Fed Tightens Oversight on Insurance, Non-Bank Financials

Jaret Seiberg, an analyst for Guggenheim Securities LLP, said the nonbank firms likely to be designated as SIFIs are GE Financial, Prudential Financial Inc., American International Group Inc. and MetLife Inc. He said BlackRock Inc. and Pacific Investment Management Co. LLC, or PIMCO, also face a "real risk" of being designated.

The Fed has authority to make SIFIs shed operations deemed too risky, increase capital levels to account for the risk level of other operations, and map out living wills that can be used to wind down the institutions should they fail. The firms also will be required to submit reports to the Federal Reserve, the FSOC, and the Federal Deposit Insurance Corp. on the company's credit exposure to other significant nonbank financial companies and significant bank holding companies as well as the credit exposure of such significant entities to the company.

Seiberg predicted in a research note that eventual designations may initially cause negative market reactions but called those worries "overblown." He said the Fed is expected to tailor its supervisory regime for each firm to its individual business model and the nature of the risks it has incurred.

Wednesday's rule also defined the terms "significant nonbank financial company" and "significant bank holding company." Those definitions are important because the factors the FSOC must consider when determining whether to designate a nonbank financial company for Fed supervision is the extent and nature of the company's transactions and relationships with other significant nonbank financial companies and significant bank holding companies.

Although the new definition of what constitutes a firm primarily engaged in financial activities takes effect May 6, FSOC is not expected to designate any nonbank firms as SIFIs for some time. "The designation clearly carries a whole lot of burden, so many firms will try to fight this," said Kevin Petrasic, a partner at Paul Hastings LLP.

Written by William McConnell in New York
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