The “de-designation” of once-giant insurance company American Insurance Group (AIG) as a systemic nonbank financial company should be incentive for other firms still designated as such to reduce their impact on the financial system, the chairman of the nation’s central bank said Monday.
“It is important to continue to monitor large nonbank financial firms to ensure that, should they encounter distress, the functioning of the broader economy is not threatened,” said Federal Reserve Board Chairman Janet L. Yellen in a statement, following the Financial Stability Oversight Council’s (FSOC) decision Monday to rescind the designation of AIG as a systemic nonbank financial company. “The possibility of de-designation provides an incentive for designated firms to significantly reduce their systemic footprint.”
Yellen said FSOC’s decision came because the company became smaller and posed less of a threat to financial stability. “For example, it has reduced its assets by more than $500 billion, wound down its Financial Products division, and sold off its mortgage insurance company,” Yellen said.
But while the central bank leader acknowledged that the FSOC action could have consequences for the company, the larger impact is manageable. “Although AIG’s distress could lead to a run by policyholders on a portion of its annuities and other insurance products, the financial system should be able to handle the potential fire sales,” she said.