WASHINGTON, Sept 9 (Reuters) - U.S. regulators are nearing a final decision on whether to bring mega insurer Prudential Financial under the tougher oversight usually reserved for Wall Street's largest banks.
If regulators decide a non-bank firm is so big and risky that its failure could threaten the financial system, they can vote to bring it under the scrutiny of the Federal Reserve and subject it to a host of new restrictions.
The Financial Stability Oversight Council, a group of top regulators, proposed in June that Prudential deserves the "systemically important" distinction, but Prudential has fought back.
Prudential has argued in recent weeks that it is not too big to fail and that it would be wrong to submit an insurer to regulation designed for banks.
The oversight council has until Sept. 23 to weigh Prudential's appeal, and a vote could come up when the FSOC holds a closed-door meeting on Tuesday.
As the first firm to fight being tapped, Prudential has been closely watched by experts and industry observers eager for insight into how systemically important firms will be chosen and regulated.
If Prudential is designated, its decisions about whether to take its appeal to court and how to handle new regulations could create a playbook for other companies.
"These firms all have an issue of, at the end of the day, they're going to be regulated by the Fed...so how much they push back, argue, sue could really come back to hurt them over the long term," said Dan Ryan, head of the financial services practice at PricewaterhouseCoopers.
"It's a very delicate game that they're playing."
Congress created the council as part of the 2010 Dodd-Frank oversight law and gave it the power to identify non-bank firms that could pose a threat to financial system stability.
Bank holding companies with more than $50 billion in assets, including JPMorgan and Goldman Sachs, automatically got tagged as systemic.
Regulators voted in June to subject not only Prudential, but also American International Group and General Electric's finance arm to tougher scrutiny. AIG and GE Capital accepted the designation, while Prudential appealed to the FSOC.
There's no question that Prudential is big. It has $1 trillion in assets under management, according to its website, is the second-largest U.S. life insurer, and in July was one of nine firms tagged as a GSII, or a globally systemically important insurer.
U.S. insurance officials say that unlike banks, insurers are unlikely to suffer runs by customers in times of trouble.
"The life insurance industry is a source of financial stability," MetLife Chairman Steven Kandarian said during a recent earnings call. "Even during periods of financial stress, that long-term nature of insurance liabilities protects against bank-like runs and the need to sell assets quickly."
MetLife has said it is in the early stages of regulators' consideration. Prudential and MetLife declined to comment for this story.
PwC's Ryan said one big concern for insurers is that new capital rules, or limits on funding business activities through debt, might conflict with existing requirements. Insurers do not have a federal regulator; they are overseen at the state level.
Insurers also calculate their capital needs differently than banks do, Ryan said. Regulators have said they are aware of the potential conflict.
If Prudential is designated, its decisions about whether to go to court -- and the success of its arguments there -- could serve as a guide for companies that go through the process later.
Under Dodd-Frank, designated companies may seek an judicial appeal. A spokesman for Prudential declined to comment on whether the company would go to court if it is designated.
If a firm did appeal to a court, it would likely make the argument Dodd-Frank critics have made for months - that it is still not clear what makes a firm systemically risky.
"They're basically saying that a few of these institutions are big enough to pose a threat because they could be exposed to runs," said Scott Harrington, a professor at the University of Pennsylvania's Wharton School.
"I was a little surprised by that rationale from an economic perspective because it seemed to pay fairly little attention to the history of what's happened with insurance companies," he said.
The oversight council looks at firms' transactions with banks and other firms, their importance as a source of credit and their reliance on short-term funding, among other factors.
Supporters, such as former Representative Brad Miller, a North Carolina Democrat, say the process is sufficient.
"Some of the firms that have caused the greatest destabilization of the financial system were not obviously systemically important, and would probably not have been systemically important based upon just mechanical formulas," said Miller, who is now a senior fellow for economic policy at the left-leaning Center for American Progress in Washington.