Prudential Financial Inc. said new global rules for financial firms won’t work and the Federal Reserve’s revised mandate to potentially oversee insurers is science fiction.
Prudential Vice Chairman Mark Grier told analysts today that Solvency II and Basel III, the insurer and bank standards being readied by European regulators, will fail in a crisis. In remarks about the Fed’s expanded role, Grier said he refers to systemically important financial institutions, or SIFIs, as “sci-fi,” which is short for science fiction.
“Solvency II and Basel III aren’t even going to work,” Grier said today at Newark, New Jersey-based Prudential’s annual investor and analyst conference. “If there’s a crisis everybody’s going to go back to doing stress tests because no one’s going to believe those things.”
Executives at financial firms are squaring off against regulators as new rules, designed to prevent a recurrence of the 2008 credit freeze, are implemented. Jamie Dimon, chief executive officer of JPMorgan Chase & Co., said this week that regulation may slow the economy. Federal Deposit Insurance Corp. Chairman Sheila Bair today urged regulators to continue “full speed ahead.”
The biggest U.S. life insurers, including No. 2 Prudential, will be subject to Fed oversight if they are deemed systemically important to the stability of the financial system. Grier said he hopes federal regulators won’t apply bank rules to insurance companies and that he expected Prudential to face greater scrutiny, even if it isn’t designated a SIFI.
‘The Sci-Fi World’
“I prefer to call it sci-fi, by the way,” Grier said. “They won’t let Prudential go unregulated at the group level. Whether it’s in the sci-fi world, or whether it’s for some other reason, I think the more important question for us and for our industry is, ‘Will we just be pounded into a bank framework?’”
Barbara Hagenbaugh, a spokeswoman for the Federal Reserve, declined to comment.
Insurance in the U.S. is currently regulated by watchdogs at the individual states. After the Dodd-Frank Wall Street reform act expanded the role of the Fed and created a new federal office of insurance, the American Council of Life Insurers called on carriers to bring their concerns to U.S. regulators.
Grier’s use of the term sci-fi may indicate mistrust that the new rules, which entail compliance costs, would prevent another period of market instability, said Lawrence Kaplan, an attorney at Paul Hastings Janofsky & Walker LLP in Washington.
“By using the colloquialism, he is politely dissing the new structure,” said Kaplan, a former senior attorney at the Office of Thrift Supervision. “Maybe what he was getting at is it’s really imaginary and theoretical that all these bureaucratic requirements are going to help prevent another crisis.”
Bob DeFillippo, a spokesman for Prudential, said the sci-fi characterization was meant to reflect the change represented by the involvement of federal agencies in insurance industry oversight.
“He’s referring to the disconnect between the fact that insurance has historically been regulated by the states,” DeFillippo said. “It’s that disconnect that is the reference to sci-fi.”