U.S. regulators propose new oversight of AIG, Prudential

By Emily Stephenson

WASHINGTON (Reuters) - U.S. regulators on Monday proposed designating non-bank financial companies including American International Group and Prudential Financial for heightened regulatory oversight.

A group of regulators known as the Financial Stability Oversight Council said it had voted to propose dubbing certain companies "systemically important," or so big their failure could destabilize financial markets, in a long-anticipated and controversial move aimed at cracking down on risks.

Regulators did not name the companies involved. AIG and Prudential both issued statements on Monday saying they had been notified that the risk council had proposed designating them.

A final determination by the council that a firm is systemically important would trigger extra regulatory scrutiny by the Federal Reserve.

GE Capital, the finance arm of General Electric, has previously said it was under consideration. A spokesman for the company did not immediately respond to a request for comment.

"Today, the council took another important step forward by exercising one of its principal authorities to protect taxpayers, reduce risk in the financial system, and promote financial stability," Treasury Secretary Jack Lew, who chairs the oversight council, said in a statement.

The 2010 Dodd-Frank law created the risk council and gave it the power to bring big, non-bank firms under the Fed's oversight after several such companies flirted with failure or had to be bailed out during the 2007-2009 financial crisis.

Companies tagged for extra oversight would have to participate in regular stress tests, comply with new capital requirements and write living wills, or blueprints for how they could be taken apart if they were to fail.

The risk council has so far designated eight large clearinghouses and other firms that handle trillions of dollars in transactions as systemically important.

Observers have been expecting a new round of designations for months. Members of the risk council initially said they hoped to designate non-bank companies by the end of 2012.

"It's almost three years since they enacted the statute and, you know, if these were truly institutions that are menacing to the system, which is what they are supposed to be, then it seems like we should have known it more than three years late," said Cornelius Hurley, a professor of banking law at Boston University.

Critics of the risk council's process, on the other hand, argue that regulators have not explained why they believe the non-bank companies under consideration would destabilize financial markets if they were to fail.

Others say tagging some companies systemically important could send a message to markets that those companies would be bailed out in a crisis because regulators believe they are "too big to fail."

"Designating any company as 'too big to fail' is bad policy and even worse economics," said Representative Jeb Hensarling, a Texas Republican who is the chairman of the House of Representatives Financial Services Committee, in a statement.

The oversight council is already the subject of a lawsuit, and other challenges could come later.

Companies have 30 days after the council votes to contest a proposed designation by requesting a hearing. The council then has 30 days to hold the hearing.

Prudential said it was considering whether to request a hearing. AIG declined to comment on whether it would appeal.

(Reporting by Emily Stephenson, additional reporting by Douwe Miedema in Washington, and Peter Rudegeair and Ernest Scheyder in New York; Editing by Andrew Hay, Bernard Orr)