US puts Prudential Financial into ‘too big to fail’ list

The US Financial Stability Oversight Council’s (FSOC) designated insurance company Prudential Financial to its list of “too big to fail” institutions. The company has become the third non-bank firm placed under a tighter regulatory regime to reduce risks to the financial system.

What are “too big to fail” institution?

This is a popular term used in the US for the firms which are so large and so interconnected that their failure would be disastrous to the economy. As per US Federal Bank Chief Ben Bernanke “A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences.” The idea proposes that in a crisis situation these too-big-to-fail firms should be given government assistance not out of favoritism or particular concern for the management, owners, or creditors of the firm, but because they recognize that the consequences for the broader economy of allowing a disorderly failure greatly outweigh the costs of avoiding the failure in some way. Common means of avoiding failure include facilitating a merger, providing credit, or injecting government capital, all of which protect at least some creditors who otherwise would have suffered losses.

As per FSOC naming financial institutions “too big to fail” companies is an important tool to mitigate risks posed by those companies, fill gaps in their overall supervision, tighter control, and provide enhanced capital standards under which they must operate.

Which are the three non-bank financial companies designated as “too big to fail” institutions?

The three companies designated as “too big to fail” are:

  1. Prudential Financial
  2. American International Group
  3. General Electric Capital Corp.
What is Financial Stability Oversight Council (FSOC)?

The FSOC is a United States federal government organization, which operates under the US Treasury. It was established under the Dodd–Frank Wall Street Reform and Consumer Protection Act, which came up in response to 2008 financial crisis and was signed into law in 2010. FSOC has broad authorities to identify and monitor excessive risks to the U.S. financial system arising from the distress or failure of large, interconnected bank holding companies or non-bank financial companies, or from risks that could arise outside the financial system; to eliminate expectations that any American financial firm is “too big to fail”; and to respond to emerging threats to U.S. financial stability.

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