FSOC - Prudential - Determination and Dissents - Snippets

  • 2013 0919 - FSOC/Prudential - Basis for the Financial Stability Oversight Council’s Final Determination Regarding Prudential Financial, Inc. - 12p

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  • (p1) - ....section 113 of the Dodd-Frank Act and the Council’s interpretive guidance regarding nonbank financial company determinations (Interpretive Guidance),1 -----  the Council has voted to make a final determination that material financial distress at Prudential could pose a threat to U.S. financial stability and that Prudential will be supervised by the Board
    of Governors and subject to enhanced prudential standards.

    • 112 C.F.R. part 1310, app. A (2013).
  • (p1) - The Council’s final determination does not constitute a conclusion that Prudential is experiencing material financial distress.
  • (p2) - Because of Prudential’s interconnectedness, size, certain characteristics of its liabilities and products, the potential effects of a rapid liquidation of a significant portion of its assets, potential challenges with resolvability, and other factors described herein, material financial distress at Prudential could lead to an impairment of financial intermediation or of financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy.
  • (p2) - As of December 31, 2012, the company had approximately $3.6 trillion of total in-force life insurance and $709 billion in total on-balance sheet assets, including $424 billion of general account investments and cash and $253 billion of separate account assets.
  • (p2) - Material financial distress at Prudential could impair the ability of pension plans to meet certain obligations to retirement plan participants.
  • (p2) - While exposures to Prudential may be small relative to the capital of its individual counterparties, aggregate exposures are significant enough that they could amplify the risk of contagion among other financial institutions if Prudential were to experience material financial distress.

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  • A significant amount of Prudential’s U.S. life insurance policies are subject to early withdrawal and include a significant cash surrender value.
  • While the company has the right to defer payouts <Moratorium> on a significant portion of policies with immediately payable cash surrender values, the company
    could have strong disincentives to invoke this option because of the negative signal invoking such a deferral could provide to counterparties, investors, and policyholders.
  • The exercise of such contractual provisions to defer payouts, combined with operational and logistical considerations, could slow any asset liquidation.
  • However, this action, if taken at a time when the company is experiencing material financial distress, could spread concern regarding the company in the marketplace. <Runs / Contagion>
  • Such concern could exacerbate the company’s material financial distress and result in negative effects for counterparties, policyholders, and the broader industry. <Procyclical???>
  • Actions to temporarily restrict customer access to withdrawable policies <Moratorium> could also induce
    customer concern about access to funds at other insurance companies with similar assets or product profiles, especially in the context of a period of overall stress in the financial services industry and in a weak macroeconomic environment. <Contagion / Runs>

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  • In the event of its material financial distress, Prudential could face pressure to rapidly liquidate a significant portion of its general account assets to meet redemption and withdrawal requests. <Run>
  • In addition, although Prudential’s separate account contract holders have disincentives for surrendering policies <Surrender Charges, They may be uninsurable>, a significant portion of Prudential’s separate account liabilities also can be surrendered at or near market value.
  • Therefore, separate account contract holders, particularly those with guaranteed contracts, also could choose to surrender policies, particularly if they lost confidence <Crisis in Confidence> in Prudential’s ability to meet its obligations.
  • Furthermore, beyond the direct effect of Prudential’s asset liquidation on the financial markets, other insurance companies could be exposed to second-order effects if asset liquidations at Prudential sparked a loss of confidence in the broader insurance industry because of their similar product or balance sheet profiles, potentially leading to policy withdrawals, surrenders, or redemptions at other major insurers.
  • Furthermore, beyond the direct effect of Prudential’s asset liquidation on the financial markets, other insurance companies could be exposed to second-order effects if asset liquidations at Prudential sparked a loss of confidence in the broader insurance industry because of their similar product or balance sheet profiles, potentially leading to policy withdrawals, surrenders, or redemptions at other major insurers.
  • Asset liquidation resulting from withdrawal requests of Prudential’s policyholders could be exacerbated by its derivative and short-term funding counterparties, which could, under existing agreements, require Prudential to either post additional collateral or to raise cash to close out certain funding transactions.
  • Prudential plays a leading role in the annuity, retirement, asset management, and commercial mortgage servicing markets.

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  • Additionally, while the sale of large blocks of Prudential’s business could limit the associated harm resulting from material financial distress at Prudential, selling sizable business lines could be difficult, especially in a period of stress in the financial markets and in a weak macroeconomic environment.
    • <Eric Dinallo Letter - Early on - Sell Life Insurance Companies>
    • <- GOV - AIG -Liddy - We couldn't sell Life Insurance Companies... nobody had the money, Carolyn Maloney (NY)>
    • <Executive Life - Sale... Bidders... -NOHLGHA=Bidder - Garamendi said No.>
  • The resolution of Prudential also could place significant financial and administrative strain on the state-based guaranty fund system (GA System).
    • <Book - Modernizing Insurance Regulation - Compare and Contrast
      • John Biggs Chapter 
      • NOHLGA Chapter>
  • A company is a nonbank financial company, and thus eligible for a determination by the Council, if it is predominantly engaged in financial activities, subject to certain exceptions.3
    • 3Dodd-Frank Act section 102(a)(4), 12 U.S.C. § 5311(a)(4).
  • Section 102(a)(6) of the Dodd-Frank Act provides that a company is “predominantly engaged in financial activities” if at least 85 percent of the company’s and its subsidiaries’ annual gross revenues are derived from, or at least 85 percent of the company’s and its subsidiaries’ consolidated assets are related to, “activities that are financial in nature” as defined in section 4(k) of the Bank Holding Company Act of 1956, as amended (BHC Act).4
    • 4Dodd-Frank Act section 102(a)(6), 12 U.S.C. § 5311(a)(6). The Board of Governors’ Regulation PP describes activities that are financial in nature as defined in section 4(k) of the BHC Act and establishes the requirements for determining if a company is predominantly engaged in financial activities for purposes of Title I of the Dodd-Frank Act. See 12 C.F.R. part 242.

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