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From Banking and Finance Law Daily, December 19, 2014

Metlife formally designated as SIFI

By John M. Pachkowski, J.D.

At its Dec. 18, 2014, meeting, the Financial Stability Oversight Council voted to designate Metlife, Inc., as nonbank financial company that could pose potential threats to financial stability to the United States. The vote was nine to one.

On July 16, 2013, the Council notified MetLife that the company was under consideration for a proposed determination by the Council. After over a year of engagement between the Council and MetLife, the company received a notice on Sept. 4, 2014, informing it that the Council had made a proposed designation providing an explanation of the basis of the Council’s proposed designation. The company requested a written and an oral hearing to contest the Council’s proposed determination. The Council granted the request and held an oral hearing on November 3 (see Banking and Finance Law DailySept. 5, 2014Oct. 6, 2014, and Nov. 4, 2014).

With the designation, MetLife, Inc. becomes subject to consolidated supervision and enhanced prudential standards under the Federal Reserve Board. To date, the Council has also voted to designate American International Group, Inc.General Electric Capital Corporation, Inc., and Prudential Financial, Inc., as systemically important financial institutions, the first nonbank financial companies to be subjected to consolidated supervision by the Federal Reserve Board and enhanced prudential standards (see Banking and Finance Law DailyJuly 10, 2013 and Sept. 20, 2013).

In its basis for the designation, the Council noted that it relied extensively on nonpublic information that was submitted by MetLife and attempted to provide Congress and the public with an understanding of its analysis while protecting the nonpublic information. The Council also stressed that the designation “does not constitute a conclusion that MetLife is experiencing, or is likely to experience, material financial distress.”

Critical tool. Commenting on the Council’s action, Treasury Secretary Jacob J. Lew, Chairperson of the Council, noted, “After a year and a half of extensive and in-depth analysis—including significant engagement with the company—the Council has determined that material financial distress at MetLife could pose a threat to U.S. financial stability. Designation of a nonbank financial company is a critical tool for the Council to address potential threats to U.S. financial stability. Consistent with its mandate, the Council remains focused on protecting the broader economy from the types of risk that contributed to the financial crisis.”

Dissent. As noted earlier, there was a single dissenting vote by the “Independent Member having insurance expertise”—S. Roy Woodall Jr. In his dissent, Woodall noted that “the Council should be more transparent about which of MetLife’s activities, together or separately, pose the greatest risk to U.S. financial stability in order to provide constructive guidance for the primary financial regulatory authorities, the Board of Governors, international supervisors, other insurance market participants and, of course, MetLife itself, to address any such threats posed by the company. The Notice of Final Determination that went to MetLife, while it is hundreds of pages long, is not, in my opinion, a roadmap showing any possible exit ramp.”

Woodall concluded, “After nearly 4½ years, the Council’s search for SIFIs has found potential systemic risk concentrated in the insurance sector with three of the four designated SIFIs being insurers. I am concerned as to whether different types of nonbank financial companies may be receiving disparate treatment both in the Council’s analysis and processes. As the Council continues its work, it is my hope that we can concentrate our efforts to consider regulatory reform and improve regulation of those large nonbank financial companies and their activities that have been left largely unexamined since the financial crisis, but that may significantly risk financial instability. The Council’s vigor in evaluating such unexamined (and in some cases unregulated) nonbank financial companies is imperative in successfully fulfilling its charge to identify threats to our financial system, economy, and the American people.”

It should be noted that Woodall also dissented when Prudential Financial, Inc., was designated for enhanced supervision. In that instance, Woodall noted the Council’s analysis was “antithetical to a fundamental and seasoned understanding of the business of insurance, the insurance regulatory environment, and the state insurance company resolution and guaranty fund systems” (see Banking and Finance Law DailySept. 20, 2013).

“Identified a very large company.” North Dakota Insurance Adam Hamm, who sits as the Council’s State Insurance Commissioner Representative and is a nonvoting member, also commented on the designation. He noted the Council has failed to appropriately consider the efficacy of the state insurance regulatory system.” Hamm continued that the Council used a flawed asset liquidation argument that relied on speculative surrender amounts and does not appropriately take into account the insurance business model, insurance company regulation, and the disincentives policyholders have to surrender their insurance policies. He added the Council has failed to address the criticism that it did not conduct a robust analysis of characteristics of MetLife beyond its size, particularly as it relates to the exposure channel discussion. Hamm concluded that “Identifying outer boundaries of exposures and claiming they could impact a nebulously defined market is not robust analysis; it simply means the Council has identified a very large company.”

Disappointment. Following the designation, Metlife issued a statement as part of an 8-K filed with the Securities and Exchange Commission. Metlife stated, “We are disappointed in the FSOC decision” and “continue to believe that MetLife is not systemically important under the Dodd-Frank Act’s criteria.” The company added, “singling out two large life insurance companies for SIFI designation will harm competition, lead to higher prices and less choice for consumers, and ultimately could result in less financial protection for middle-class families—who need it the most.” Metlife concluded that it “will carefully review the designation rationale” before deciding whether to seek judicial review.

Companies: American International Group, Inc.; General Electric Capital Corporation, Inc.; MetLife, Inc.; Prudential Financial, Inc.

MainStory: TopStory DoddFrankAct FederalReserveSystem FinancialStability

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