The U.S. Department of Treasury said it plans to appeal a federal judge’s decision to remove the designation of MetLife as a non-bank “systemically important financial institution” (SIFI), according to a statement on Treasury’s website.
Judge Rosemary Collyer, in the U.S. District Court in the District of Columbia, ruled in a sealed opinion last week that the SIFI tag should be removed from MetLife, stating that the government body that applied the designation used a “fatally flawed” process. The removal of the SIFI designation means that the failure of the global insurance provider would not have catastrophic consequences for the U.S. economy.
Along with the government’s announcement that it would appeal Collyer’s ruling, Treasury Secretary Jacob Lew defended FSOC’s decision to designate MetLife as a SIFI.
“Wall Street Reform was enacted in response to serious problems identified during the financial crisis, and to protect taxpayers from having to bear the enormous burdens of another crisis,” Lew said. “Regulators previously did not have the tools to understand and respond to the risks posed by the distress of companies such as MetLife. In using these tools, FSOC has taken a deliberative and data-driven approach, relying on a careful analysis of available information, including intensive engagement with each company and its regulators to evaluate how the firm’s distress could affect the financial system.”
The non-bank SIFI tag was applied to MetLife in December 2014 by the Financial Stability Oversight Council (FSOC), a government body created by the Dodd-Frank Act in 2010 in order to identify risks to the financial stability of the U.S. economy. The FSOC is comprised of 10 voting members (all Democrats) and five non-voting members. The voting members consist of the heads of nine government regulatory agencies (Treasury, the Fed, FDIC, CFPB, FHFA, SEC, CFTC, OCC, and NCUA) and one independent member. That independent member, Roy Woodall Jr., was the lone dissenter in the Council’s 9-1 vote to designate MetLife as a nonbank SIFI 16 months ago.
MetLife sued the FSOC in January 2015 to have the SIFI designation removed, because as a nonbank SIFI, MetLife said it would be subject to heightened regulation which the company says will increase compliance costs, hence increasing costs to consumers without any added safety benefit for the financial system. MetLife even set up a portion of its website devoted to providing a “central point for information related to the judicial review of FSOC’s designation.”
“We intend to continue defending vigorously the process and the integrity of FSOC’s work, and I am confident that we will prevail.”
Treasury Secretary Jacob Lew
Collyer’s 33-page opinion was unsealed on Thursday. In that opinion, she wrote that the court was rescinding the government’s designation of MetLife as a nonbank SIFI on two grounds.
“First, FSOC made critical departures from two of the standards it adopted in its Guidance, never explaining such departures or even recognizing them as such,” Collyer wrote. “That alone renders FSOC’s determination process fatally flawed. Additionally, FSOC purposely omitted any consideration of the cost of designation to MetLife. Thus, FSOC assumed the upside benefits of designation (even without specific standards from the Federal Reserve) but not the downside costs of its decision. That is arbitrary and capricious under the latest Supreme Court precedent (Michigan v. Environmental Protection Agency in June 2015).”
Lew said in response to the ruling that Congress did not require the FSOC to conduct a formal cost-benefit analysis of SIFI designations “for good reasons.”
“Such a requirement would impair the Council’s ability to address the risks of a future financial crisis that could severely damage the financial system and the U.S. economy,” Lew said. “As we have learned, the far-reaching damage of a financial crisis is difficult to predict and can cause massive economic pain to families and firms across the United States.”
Opponents of Dodd-Frank’s financial reform who believe the financial industry is overregulated have viewed the decision to remove MetLife’s SIFI tag as a major victory for their camp. One such opponent was House Financial Services Committee Jeb Hensarling (R-Texas), who issued a statement saying that “today’s SIFI designations are just tomorrow’s taxpayer-funded bailouts. SIFI is Washington’s way of officially anointing these companies as too big to fail, despite promises that the Dodd-Frank Act would end too big to fail.”
Lew said that Dodd-Frank opponents should not be so quick to celebrate, however.
“Some opponents of financial reform have hailed the court’s decision as a win for our financial system,” Lew said. “This is wrong and dangerously ignores the lessons of the financial crisis. FSOC’s authority to designate nonbank financial companies is a critical tool to address potential threats to financial stability, and it has made our financial system safer and more resilient. We intend to continue defending vigorously the process and the integrity of FSOC’s work, and I am confident that we will prevail.”
Other nonbanks to receive the SIFI designation from FSOC were American International Group (AIG), Prudential Financial, and General Electric. MetLife is the first institution to challenge the SIFI designation.