By Arthur D. Postal
WASHINGTON – The Treasury Department has rejected MetLife’s appeal of its designation as a systemically important financial institution (SIFI).
MetLife officials said they were disappointed and have 30 days to consider appealing the decision, most likely in the U.S. Court of Appeals for the D.C. Circuit.
Grace Vandecruze, managing director of Grace Global Capital in New York and former head of the regulatory advisory practice at Swiss Re, noted that MetLife received “tremendous support” from state regulators, including New York and Delaware, arguing that it does not meet the criteria of a SIFI, but she is not surprised that MetLife was designated the Department of Treasury’s Financial Stability Oversight Council. “Even if MetLife chooses to appeal the FSOC’s decision, I believe that it is a relatively safe and certain bet that the company will lose the appeal in 2015,” Vandecruze said.
She explained that the last financial crisis era “has ushered in an unrelenting pace of regulations from federal and international regulators.”
None of the arguments attempting to prevent MetLife’s designation as a SIFI, including the fact that the company does not engage in nontraditional, noninsurance activities, will be successful, she said.
Vandecruze said the ruling means stricter capital standards and various iterations of stress test from federal regulators. “However, the cloud of uncertainty remains as those standards and rules have yet to be determined,” she said.
In addition, MetLife will be subject to additional capital standards as a global systemically important insurer or G-SII under the requirements to be adopted by the International Association of Insurance Supervisors in 2019.
“In this regulatory environment, the one certainty and sure bet for MetLife is an ever-increasing regulatory compliance expense along with higher capital requirements,” Vandecruze said.
MetLife was originally designated a SIFI Aug. 5. But, it appealed the designation and a hearing was held in November. The final decision was made today at a private FSOC meeting.
In its statement, MetLife said that it continue to believe that MetLife is not systemically important under the Dodd-Frank Act’s criteria, and the company has presented substantial and compelling evidence to FSOC to support this conclusion.”
The statement added that, “As we have said many times, 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.”
The statement argued that the “FSOC has a superior regulatory tool at its disposal if necessary – an approach based on identifying and regulating activities that pose systemic risk irrespective of the size or type of entity that engages in them.”
The statement said that the “FSOC has already embraced this activities-based approach for the asset management industry but has rejected it for the life insurance industry.”
However, such a possibility was considered “remote” in an investment note sent last week by John Nadel, an analyst at Sterne, Agee & Leach.
“While there has been some speculation MetLife might avail itself of the last and somewhat drastic step of challenging the final ruling in court, we think the probability of such a decision on the part of MetLife's executive management and board is extremely remote,” Nadel said.
Nadel also said in his note that the congressional decision last week to allow the Federal Reserve to use insurance accounting in evaluating the financial health of insurance SIFIs likely made the decision easier for MetLife for digest.
Earlier today, in another investment note, Sean Dargan of Macquarie in New York said, “There’s probably not a chance that they escape. I'm working under the assumption that Met is going to be a SIFI.”
Seeking Alpha said in a note that MetLife's balance sheet has expanded this year to more than $900 billion in assets, passing Goldman Sachs to become the fifth-largest S&P 500 company on that metric. “MetLife is also bigger than Prudential Financial and American International Group -- both of which have already been designated as SIFIs,” Seeking Alpha said.
Seeking Alpha also said that “size alone doesn't necessarily make a company systemically important,” citing a former Treasury official, noting assets can be transferred to other firms if they can perform the same functions. Nevertheless, the official said, “MetLife seems resigned to its fate, and is now getting ready to work with the Fed on designing capital rules aimed at insurance rather than banking.”
Arthur D. Postal has covered regulatory and legislative issues for more than 30 years in Washington, D.C. He can be reached at [email protected].
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