US states need to boost their credibility with the European Union. With deregulation in the air in Washington, insurers American International Group and Prudential Financial could lose their designations as systemically important financial institutions – along with MetLife. That would end Federal Reserve monitoring and throw oversight back on individual states. But the three companies are also global SIFIs in the eyes of regulators in the EU and elsewhere. From their perspective, state watchdogs might not cut it.
President Donald Trump's administration is reviewing the role of the Financial Stability Oversight Council. The group, made up of all the federal financial regulators, has the power to designate non-bank firms as SIFIs, putting them under extra Fed supervision. AIG and Prudential are within that regime, while MetLife has been successful so far in its legal fight against SIFI status. One possible outcome of the FSOC reboot is the removal of the designation for all the insurers.
Yet AIG, Prudential and MetLife are still considered systemically important, alongside huge insurers from other countries, by the global Financial Stability Board. The European Union has recognised the Fed as a credible supervisor for US insurers that are FSB-designated SIFIs and prefers to coordinate with the US central bank. If the FSOC's SIFI designation is removed, though, the EU's counterparts would be states like New York and New Jersey.
State regulators have decades of experience overseeing insurance companies, but the system is disjointed because each has its own rules. Many states have also focused only on activities in their locale, in addition to concentrating solely on insurance operations, even when they have the authority to impose broader oversight. Under a proposed agreement between the EU and the United States on insurance regulation, the Europeans may recognize America’s state-based system. But the not-yet-final deal would stop short of granting states' oversight a trusted status that could free US firms of certain EU rules.
New Jersey, where Prudential is based, is conducting a full review of the company and all of its activities, insurance-related and otherwise. It would make sense for other states to follow that lead. Otherwise, freeing US insurers of red tape at home may only mean they are tied up with more of it overseas.