As widely anticipated, the FSOC Wednesday morning de-designated Prudential and, in doing so, ended firm-specific SIFI designations for the foreseeable future. In this report, we examine the rationale for the unanimous FSOC action and identify implications for the activity-and-practice designation policy FSOC now plans. Although this was discussed only during FSOC’s closed session, a recent Treasury report (see Client Report INSURANCE57) made clear that FSOC will try now to use its bully pulpit to sanction problematic activities across the U.S. financial sector. As we have noted, this is a more macroprudential approach, but one facing significant obstacles given FSOC’s statutory authority (see FSM Report SYSTEMIC29) only to ask – not order – primary federal or state regulators to act. The many significant non-bank financial institutions wholly outside U.S. prudential regulation also impedes action on activity-or-practice designation. As detailed below, we note in particular the focus now by FSOC on resolvability and its very different approach to actions Prudential, state regulators, and state guaranty associations have taken to ensure resilience to both liquidity and solvency risk.
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