A key response to the 2008 financial crisis was setting up asuper-group of regulators to protect the economy from anotherdisastrous crash. But in the Trump era, flagging new dangers hastaken a backseat to cutting constraints on business.

The latest blow came Wednesday when the Financial StabilityOversight Council (FSOC) said it no long considered PrudentialFinancial Inc. so big and complex that the insurer's failure couldtrigger a panic.

Prudential was the last non-bank to carry the regulator'sdreaded systemic-risk label, which brings tough oversight and steepcompliance costs. When Congress created FSOC through the Dodd-FrankAct, many on Capitol Hill and Wall Street expected it to impose thetag on a number of hedge funds, private-equity firms, and insurers.Instead, the watchdog is retreating.

Since officials picked by President Donald Trump took the reins,the group has been more focused on making it easier for companiesto escape the government's grip than examining whether additionalfirms should be tapped. With such an agenda, it seems unlikely thatany non-bank giants, such as Berkshire Hathaway Inc. or BlackRockInc., will be declared systemically important financialinstitutions anytime soon.

“They made it clear that they didn't want to designate anyone,”said Marcus Stanley, policy director at Americans for FinancialReform in Washington.

Despite FSOC's reluctance, Wall Street retains plenty ofsystemic-risk labels. That's because Dodd-Frank automaticallyslapped JPMorgan Chase & Co., Citigroup Inc., Goldman SachsGroup Inc., and other huge lenders with aggressive Fed supervisionand stiff capital rules.

Yet the hesitancy to subject non-banks to added scrutiny comesat a potentially fraught time. Former Federal Reserve Chair JanetYellen is among those who have raised concerns that some of theriskiest financing of highly indebted companies is being doneoutside the traditional banking sector. And private-equity firmshave seized an increasing share of the lending market.

FSOC members include the heads of the Treasury Department, theFed, and the Securities & Exchange Commission (SEC). TreasurySecretary Steven Mnuchin, who leads the panel, said in a Wednesdaystatement that the Prudential decision shows “the council hascontinued to act decisively to remove any designation that is notwarranted.” He added that regulators conducted a detailed analysisverifying that the insurer didn't pose a “significant risk” tofinancial stability.

Prudential added that it shouldn't have been labeled a threat inthe first place, issuing a statement that said it “never met thestandard for designation.”

Other companies have made similar arguments, claiming theprocess was opaque, inconsistent, and even political.

American International Group Inc. (AIG), which played a centralrole in the 2008 crisis, got labeled even though it had shrunkafter the meltdown. Additional insurers including Prudential andMetLife Inc. that were bigger than AIG also received the tag. ButWarren Buffett's Berkshire and Blackrock, the world's largest moneymanager, didn't.

Last year, Treasury proposed a roadmap for overhauling FSOCdesignations that would make it harder to affix the risk tags.

The plan urged the council to focus on how an entire industrymight pose risks, rather than prioritizing the dangers presented byspecific firms. Labeling companies as systemically important shouldbe done only if the council is certain a firm is likely to get intotrouble. The result: More hurdles for a process that had mostlyground to a halt even during the Obama administration.

Craig Phillips, a top Treasury official, said recently thatregulators are working on a way to declare specific businessactivities—not companies—as risks.

Such an approach is designed to fail because FSOC has no directmethod for regulating activities that set off alarms, says Stanley.He calls it “an excuse for doing nothing.”

At the height of its muscle-flexing in the years immediatelyafter the 2008 crisis, FSOC placed Prudential and three otherfinancial titans under heightened Fed oversight: AIG, MetLife, andGeneral Electric Co.'s finance arm. Asset managers Blackrock andPacific Investment Management Co. avoided the risk label afteraggressively lobbying agency heads appointed by former PresidentBarack Obama.

Starting in 2016, companies began slipping out of FSOC's grasp,with GE Capital exiting after selling financial assets and MetLifewinning a court battle over its designation. Last year, regulatorsselected by Trump helped let out AIG.

From: Bloomberg

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