American International Group (AIG) is now officially regulated as one of the first two non-banks designated as a systemically important financial institution (SIFI).
The Financial Stability Oversight Council (FSOC) officially announced late Monday that it had so designated AIG and GE Capital as SIFIs in a statement issued by Jacob Lew, Treasury secretary and FSOC chairman.
The statement also said that Prudential Financial had appealed such a designation and that the FSOC will hold a closed hearing to hear Pru’s appeal within 30 days.
However, the designation is in some ways a formality because AIG has been under consolidated supervision of the Federal Reserve Bank of New York as a savings and loan holding company since last August, when it fell below the threshold of having more than 50 percent of its stock owned by the government.
The FSOC designation will bring with it higher standards than mandated for thrift holding companies.
These will include capital standards and other prudential standards, higher liquidity requirements, tighter risk management, concentration limits and a requirement that it create a “living will,” a process for liquidating the company if it faces solvency problems.
“Today, the FSOC has taken a decisive step to address threats to U.S. financial stability and create a safer and more resilient financial system,” Lew said. “These designations will help protect the financial system and broader economy from the types of risks that contributed to the financial crisis. The Council will continue to review additional companies in the designations process to address remaining threats to financial stability.”
AIG added in a statement after the stock market closed Monday that the designation was effective Monday night.
“After the close of business on July 8, 2013, AIG received notice from the U.S. Treasury that the FSOC has made a final determination that AIG should be supervised by the Board of Governors of the Federal Reserve System as a systemically important financial institution pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. AIG did not contest this designation and welcomes it,” the statement said.
The decision is historic since no insurer has been federally regulated for more than 150 years, according to recent testimony by an official of the Congressional Research Service.
Indeed, the 1999 Gramm-Leach-Bliley law specifically barred the Fed from regulating insurance holding companies. The provision was drafted by Rep. Jeb Hensarling, R-Texas, now chairman of the House Financial Services, but then an aide to Sen. Gramm, R-Texas, then chairman of the Senate Banking Committee.