TheDeal: FSOC Designates Nonbank SIFIs

By Contributor Jane Searle

NEW YORK ( TheStreet) -- Dealmaking and the use of capital among nonbanks will be affected by a pivotal ruling on systemically important financial institutions, a group expected to include American International Group ( AIG), Prudential Financial ( PRU), General Electric's ( GE) GE Capital and MetLife ( MET)

The Financial Stability Oversight Council made its proposed designation of nonbanks SIFIs on Monday. Designated institutions, whose identities weren't disclosed by the FSOC, now have 30 days to protest the ruling.

Nonbanks contributed to the seize-up of markets during the financial crisis, leading to the $182 billion bailout of AIG by the Federal Reserve -- the largest in history. The Treasury owned 92% of the insurer at one point but has since sold its entire stake for a profit.


The FSOC has said nonbanks would be subject to further evaluation as potential SIFIs if they had at least $50 billion of total assets and met or exceeded hurdles such as holding $3.5 billion in derivative liabilities or $20 billion of debt.

Being designated a SIFI subjects an institution to additional regulatory oversight and requires it to hold more capital, as its potential failure is seen as posing significant risk to the wider financial system.

Macquarie Capital (USA) Inc. analyst Sean Dargan said insurers such as Prudential had changed their capital deployment strategies in the lead-up to the decision.

"The Fed may look more favorably on M&A than share repurchases as the use of capital on share repurchases is gone forever rather than being deployed," he said. "One school of thought says the Fed will put capital restraints in place to make share repurchases more difficult."


Dargan pointed to Prudential's recent purchases of life insurer Harford and its pension transfer deals with General Motors Co. and Verizon Communications Inc. as evidence that the insurer was adjusting to the new backdrop. He said the bolt-on nature of many deals in insurance means the impact on deal activity from being a designated SIFI may be minimal.

Other analysts said the naming of nonbank SIFIs would not be consequential until a final decision was made on new capital requirements.

Portales Partners LLC senior analyst Nina Gupta said the SIFI ruling could impact nonbanks' capital return or acquisition strategies, depending on final capital requirements. "AIG has a bias towards capital returns, while Prudential leans more toward acquisition," she said.

If capital requirements are tougher than expected, it may limit the ability to execute either one of these strategies.

GE Capital has also been viewed as a serial acquirer, but has divested several assets since the credit crisis as it overhauls its portfolio. GE chief executive Jeffrey Immelt last week said the company could eventually float or sell part of its business.


FBR & Co. policy analyst Edward Mills said being designated a SIFI would put a group of nonbanks under the purview of the Federal Reserve for the first time.

"It could make deals more difficult at the margins but there is no precedent for designating institutions as nonbank SIFIs," he said. "The Fed is likely to be accommodative as it finalizes rules and will tailor regulations to models of insurance companies."

Mills pointed to additional regulatory hurdles for the merger between Capital One Bank and ING Bank NV -- a SIFI -- as evidence of delays that were caused by being designated as systemically important.

Other nonbanks that could be named SIFIs include Pacific Investment Management Co. LLC, or Pimco, and BlackRock Inc.


The Federal Reserve has not developed final rules for regulating nonbank SIFIs. Mills said it would likely take well into 2014 before nonbanks were fully regulated in this fashion.

Wall Street banks that are designated SIFIs include Goldman, Sachs & Co., JPMorgan Chase & Co., Morgan Stanley, Citigroup Inc., Bank of America Merrill Lynch and Wells Fargo & Co.

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