MetLife appears to be losing its battle with the Financial Stability Oversight Council (FSOC), but the life insurance company is not about to go down without a fight. The FSOC has now voted to designate MetLife for special regulation by the Federal Reserve, a process that identifies the company as a so-called systemically important financial institution (SIFI).
The company has been in the final stages of this process for months, and it now has 30 days to challenge the FSOC’s ruling. MetLife has consistently argued that the FSOC should identify any of the company’s activities that could pose a systemic risk to the economy rather than simply singling out the company because it is one of the nation’s largest insurance firms. Identifying the supposedly risky activities would, at the very least, give the firm a chance to cut back on them.
The FSOC seems to have agreed that this sort of activities-based approach to systemic-risk designations should be applied to the asset management industry but doesn’t appear willing to give MetLife the same treatment. (Even former Democratic Representative Barney Frank from Massachusetts, one of the namesakes of the bill that gave us the FSOC, agrees that the SIFI designation should be based on specific activities.)
The most likely near-term result is that MetLife will become the first non-bank financial company to mount a full legal challenge to this FSOC process. Previously designated firms, such as Prudential, decided not to fight the designation because Dodd–Frank limits such legal challenges to “whether the final determination made under this section was arbitrary and capricious.” MetLife could become the first company to test this legal standard.
Steven A. Kandarian, MetLife’s President/CEO, had this response to MetLife’s preliminary SIFI designation:
MetLife is not systemically important under the Dodd–Frank Act criteria. In fact, MetLife has served as a source of financial strength and stability during times of economic distress, including the 2008 financial crisis.
Kandarian further noted that the company is “not ruling out any of the available remedies under Dodd–Frank to contest a SIFI designation.”
Part of the problem, though, is that Dodd–Frank does not give companies many available remedies to fight these designations. Indeed, several Members of Congress have pointed out that the restrictive nature of the FSOC designation process could violate due process.
Representatives Randy Neugebauer (R–TX) and Scott Garrett (R–NJ) have each introduced bills that would address some of these issues, but the optimal solution is to disband the FSOC altogether.
Congress should fix the most glaring weaknesses in the way the FSOC functions, and the two above-mentioned bills are a great start toward that goal. However, Congress should be wary of giving the impression that the council should remain in existence after these flaws have been addressed. The mere existence of the FSOC is wholly incompatible with the functioning of a dynamic private capital market, and Congress should eliminate it as soon as possible.
