Yellen Confirms Insurance SIFI Rules Will Differ From Banking Rules

Yellen Confirms Insurance SIFI Rules Will Differ From Banking Rules
The comic features features Fed Chair Janet Yellen as a contestant on the game show "Who Wants To Be A Millionaire". The audience behind Yellen, which includes former Fed chief Ben Bernanke, are throwing tomatoes at her. Caption for the comic: "After disappointing markets last week, will Yellen make it up to them later this year?" The Federal Reserve's decision last week not to raise interest rates disappointed most market players who were expecting the central bank to hike rates for the first time since 2006. The questions remains whether Yellen and the Fed will make it up to them at some point later this year, or will they delay the move to early 2016. The central bank has two more scheduled policy meetings before the end of 2015, in late October and mid-December.

Janet Yellen’s first Congressional testimony as Federal Reserve Chairperson was highly anticipated as a gauge on how recent soft US economic data might affect tapering (looks like it won’t), but Yellen also reiterated her stance that insurance companies, even the large systematically important financial institutions (SIFI) like American International Group Inc (NYSE:AIG) and Prudential Financial Inc (NYSE:PRU) are distinct from banks and new rules will be tailored for them instead of trying to force all SIFIs to adhere to the same set of standards.

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This is positive news: Sterne Agee

“Yet another positive comment that reinforces our expectation that the rules, once defined, will indeed differ from those applied to systemic banking institutions. That said we are mindful that the devil, as they say, will ultimately be in the details,” writes Sterne Agee analyst John M. Nadel. “Dr. Yellen further indicated that FSOC continues to work toward defining a set of rules and regulations that would be tailored to insurers, as opposed to forcing the bank model upon the insurers. We continue to believe this is positive news.”

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AIG, PRU already designated SIFIs, MET likely to follow

American International Group Inc (NYSE:AIG) and Prudential Financial Inc (NYSE:PRU) have already been designated SIFIs, and Metlife Inc (NYSE:MET) is currently in the third stage of the process and expected to be designated a SIFI as well, but it’s still not clear what that designation will really mean. Nadel doesn’t expect to see the initial proposals made available for comments until at least the end of this year, with the first stress tests starting in 2016 using 2015 financial data. But even this is the best case scenario, and detailed regulations may not go into effect for several years.

With so much lead-in time before the proposals and the stress tests, this issue will continue to take a backseat to tapering in the media for the time being, but the impact on the three insurance firms will be significant, so you can expect them to keep a close eye on these regulations as they develop.

Nadel rates Metlife Inc (NYSE:MET) and Prudential Financial Inc (NYSE:PRU) as Buys with price targets of $49.55 and $84.15 respectively (currently $49.73 and $84.45), and he rates AIG as Neutral with a $48.95 price target (currently $49.10).

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Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.
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