By Ryan Tracy
WASHINGTON--A group of top financial regulators is considering
whether Warren Buffett's Berkshire Hathaway Inc. poses risks to the
financial system and should be drawn in for tougher oversight,
according to people familiar with the discussions.
The review by the Financial Stability Oversight Council, which
is in its initial stages, may not ultimately result in the company
being designated as a systemically important financial institution,
or SIFI, the people said. But Berkshire, a conglomerate that owns a
large reinsurance business as well as other businesses, meets some
of the criteria outlined by FSOC for companies that it will
consider for tougher federal regulation as a so-called SIFI.
The review comes as the Financial Stability Board, a body of
international regulators, is also considering whether to designate
any reinsurers as global systemically important financial
institutions.
The FSOC, which is headed by Treasury Secretary Jacob Lew, has
already designated several insurance companies as "systemically
important" including American International Group Inc. and
Prudential Financial Inc. It is also in the beginning stages of
looking at whether asset management companies such as BlackRock
Inc. and Fidelity Investments should be labeled "systemic,"
according to people familiar with the matter.
Companies labeled "systemic" will be subject to oversight by the
Federal Reserve. The Fed hasn't said exactly what that oversight
will entail, but it is likely to include regulation of each firm's
capital levels, which can affect the returns firms pass on to
shareholders through dividends or buybacks. MetLife, Inc., which
has disclosed it is in the final stage of FSOC review, is fighting
the prospect of Fed oversight, and has suggested stricter capital
rules could spur it to exit certain business lines.
The Treasury Department does not comment on specific companies
under review and a Treasury spokesman declined to comment on
Berkshire.
The U.S. discussions about Berkshire Hathaway were first
reported by Bloomberg News.
The FSOC has published the criteria that senior regulators will
use to decide whether a nonbank firm should receive further
evaluation. A company must have more than $50 billion in total
consolidated assets and meet at least one of five of other specific
thresholds, including exposure to derivative liabilities,
credit-default swaps, or various measures of debt and leverage.
Berkshire disclosed in its most recently quarterly filing with
the SEC that its total assets were about $458 billion as of the
third quarter of 2013, including $301.7 billion in a category
called "insurance and other" businesses. Its derivative liabilities
were about $5.8 billion, above the $3.5 billion threshold set by
FSOC. The company also had about $31.4 billion in gross notional
credit-default swaps outstanding as of Jan. 17, according to the
Depository Trust & Clearing Corp. That is above the $30 billion
FSOC threshold for that criterion.
To receive the systemic label, Berkshire would also have to meet
the definition of a nonbank financial company. The 2010 Dodd-Frank
law defined those companies generally as having 85% or more of
their consolidated assets in or annual gross revenues coming from
financial activities.
It isn't clear if Berkshire would meet that standard. It owns a
large insurance business that includes two of the world's largest
reinsurers, General Re and Berkshire Hathaway Reinsurance Group.
Reinsurers sell insurance to other insurance companies as a way to
help them manage risk.
However, insurance has become a smaller component of Berkshire's
operating earnings and revenue over the years, as the Omaha,
Neb.-based conglomerate has made big acquisitions outside the
insurance industry. Analysts estimate insurance will account for
less than one-quarter of Berkshire's estimated overall revenue of
roughly $180 billion for 2013, with the rest coming from its
railroad, manufacturing, retail and other operations. Regulators
could also take the view that Berkshire's non-insurance holdings
are financial investments rather than businesses it will hold in
perpetuity.
"Even if they were designated a SIFI, it wouldn't matter because
they have so much cash and so little leverage," said Clifford
Gallant, an analyst at Nomura. "I don't think it would be a big
deal for Berkshire."
If a company meets the FSOC's quantitative thresholds, it
qualifies for a more in-depth review by the regulators and their
staff.
The U.S. review comes as the FSB, the international body of
regulators, is also analyzing the asset management and reinsurance
industries for possible risks to the financial system. The
international process for evaluating "systemic" firms has
previously raised concerns among some critics in the U.S., who note
that some officials who sit on FSOC--including the Fed and the
Securities and Exchange Commission--are involved in FSB decisions
before the FSOC finishes its own evaluation.
The FSB designated MetLife and Prudential as systemically
important before the council of U.S. regulators finished their
review. Roy Woodall, a former state insurance regulator who sits on
the FSOC as its member with insurance expertise, said last year
that the international decision on Prudential had "overtaken" the
FSOC process. "While the FSB's action should have no influence, I
have come to be concerned that the international and domestic
processes may not be entirely separate and distinct," he wrote in
disagreeing with the September FSOC decision to label Prudential
"systemic."
The FSB has said it would make a decision about reinsurance
companies this summer.
Anupreeta Das contributed to this article.
Write to Ryan Tracy at ryan.tracy@wsj.com
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