The Financial Stability Oversight Council has upheld its earlier designation of Prudential Financial as a "systemically important financial institution" that is held to greater regulatory scrutiny.

With powers granted by the Dodd-Frank Act, the Council has the authority to subject banks, as well as nonbank financial companies, to increased supervision and enhanced risk management standards.

In June, the Treasury Department and FSOC notified three non-bank financial companies – Prudential Financial, American International Group, and GE Capital – that they may be designated as "systemically important" because their size and scope make insolvency a threat to the broader financial marketplace. They had until July 3 to challenge that decision. Prudential was the only one that did, requesting a non-public written and oral evidentiary hearing. That unsuccessful appeal took place on July 23. Prudential now joins the ranks of designated banks that include Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup, Bank of America, Merrill Lynch, and Wells Fargo.

The FSOC was established under the Dodd-Frank Act to identify risks to financial stability through “comprehensive monitoring” of the nation's largest financial firms. Member agencies include the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Treasury Department, and Consumer Financial Protection Bureau.

Among the criteria it relies upon in evaluating whether an entity poses systemic risk: having at least $50 billion of total assets, $30 billion in outstanding credit default swaps, $3.5 billion in derivative liabilities, or $20 billion of debt. Firms with a leverage ratio of more than 15-to-1 in assets to equity, or a short-term debt to asset ratio of 10 percent, also warrant consideration. The Council also considers a company's size, interconnectedness, liquidity risk, and existing regulatory scrutiny.

Systematically important financial institutions (SIFIs) will be required to conduct regular stress tests, prepare credit exposure reports, and draft “living wills” that document resolution and liquidation plans. They may also face enhanced prudential standards, including requirements regarding risk-based capital and leverage, liquidity, risk management, early remediation, and credit concentration. Additional standards apply to capital, public disclosure, and short-term debt limit.

Under the proposed rules, designated nonbanks would be required to calculate its minimum risk-based capital and leverage requirements as if they were a bank holding company, in accordance with capital requirements published by the Federal Reserve. Those standards were increased recently when Federal Reserve governors voted to implement provisions of the Basel III international accord for bank capital standards. Banks and bank holding companies will be required to maintain a level of high-quality capital equal to 4.5 percent of their loans and risk-weighted assets.

The Dodd-Frank Act also establishes that financial companies may be subject to a special orderly liquidation process outside the federal bankruptcy code. Administered by the Federal Deposit Insurance Corporation as receiver, this would happen upon a determination that a company is in default, or in danger of default, and presents a systemic risk to U.S. financial stability.