American International Group and Prudential Financial, the two remaining non-banks considered systemically important financial institutions by federal regulators, pose less risk than when they were first designated, according to an annual assessment by the Government Accountability Office sent to Congress at the end of December.
The two firms “are relatively less interconnected and thus have smaller potential spillover effects than in prior years,” the report said. GAO officials found that total debt outstanding (excluding deposits) has decreased since the second quarter of 2012, and gross notional amounts of credit default swaps outstanding have also decreased since then.
Short-term debt as a percentage of assets, except separate accounts, decreased from the second quarter of 2012 to the second quarter of 2016, with 71% for AIG and 42% for Prudential. “These trends suggest that the two designated non-banks' resilience to shocks and financial distress has improved,” said the report, which found that total equity as a percentage of assets, except separate accounts, was 21% for AIG and 11% for Prudential in the second quarter of 2016.
In 2013 and 2014, the Financial Stability Oversight Council designated AIG, Prudential, General Electric Capital and MetLife as systemically important and placed them under Federal Reserve supervision. MetLife successfully sued to remove the designation, although the Treasury Department appealed the decision, and GE Capital reorganized and sold off parts of its business, which led to the designation being reversed.
The sixth-annual report was dictated by the Dodd-Frank Wall Street Reform and Consumer Protection Act to study the progress and impact of regulations mandated by the law, along with inter-agency coordination. The report also found indicators suggesting that large bank holding companies “have become larger but less vulnerable to financial distress.” GAO officials said in the report that “the current values of our indicators are baselines against which to compare future trends as more rules for designated non-banks are implemented.”
The report is available on the GAO's website.
