In an article published yesterday in its weekly “Credit Outlook” publication, Moody’s Investors Service said the Financial Stability Oversight Council’s designation of American International Group as a non-bank systemically important financial institution is viewed as a “credit positive.”

Moody’s positive assessment applies to AIG (Baa1, stable), and two other non-bank SIFIs—Prudential Financial, Inc. (Baa2 positive) and General Electric Capital Corporation (GECC, A1 stable).

Moody’s said that while the SIFI designation may limit operational flexibility somewhat, “the credit benefit of a non-bank SIFI designation outweighs potential drawbacks since these issuers are less likely to take actions that would adversely affect their financial profile and are more likely to retain earnings and capital.”

The article notes that non-bank SIFIs will fall under the jurisdiction of the Federal Reserve System, which will provide regulatory oversight in addition to the current state insurance regulatory framework for the insurers. SIFIs will be subject to additional scrutiny and requirements related to solvency, capital adequacy and liquidity, Moody’s noted.

Adding that the SIFIs will need to pass rigorous stress testing, Moody’s said that this will likely require them to maintain more conservative financial management, thereby limiting their ability to assume outsized risks.

“Additionally, if being a SIFI provides access to the Fed window for liquidity, these issuers could benefit from funds for unanticipated needs in a severe stress scenario,” the article said.

Listing the negative consequences, Moody’s noted that said there is a risk that minimum capital standards do not reflect the unique business model of insurers, adding that much higher capital requirements could make insurer SIFIs less competitive. Under this scenario, AIG might need to “raise prices to achieve return targets (or risk being less profitable).”

Moody’s added that lower returns could affect SIFIs’ ability to raise capital if investors find them less attractive relative to peers unburdened by the strictures of Fed supervision.

“A key question among investors and insurers is whether the Fed, in its analysis of insurance companies, will rely on ‘bank-centric’ metrics, Moody’s said, noting that the rules for non-bank SIFIs around crucial issues of capital requirements and stress testing have not yet been fully developed.

Source: Moody’s Investor Service