MetLife Challenges Systemic Risk Designation
October 7, 2014 by Zachary Tracer and Ian Katz
MetLife Inc., the largest U.S. life insurer, is challenging a U.S. finding that it poses a potential risk to the financial system if it were to fail.
MetLife requested a hearing before the Financial Stability Oversight Council, or FSOC, to explain why the firm shouldn’t be considered a systemic risk, the New York-based insurer said today in a regulatory filing. If MetLife’s bid to escape the risk tag is rejected at this stage, the firm could challenge the designation in court.
“On a fundamental philosophical level, they just disagree with the designation and will do everything they can to continue the fight,” Ed Mills, an analyst at FBR Capital Markets, said by phone before the decision was announced. “They want to fight this as much as possible for as long as possible.”
Chief Executive Officer Steve Kandarian, 62, is pushing back against increased U.S. oversight that he’s said could weigh on profits at his firm. Designation as a systemically important financial institution, or SIFI, would subject MetLife to regulation by the Federal Reserve, which hasn’t yet crafted final rules for the supervision.
FSOC has 10 members and is led by Treasury Secretary Jacob J. Lew. The panel now has 30 days to hold a hearing for MetLife.
Insurers in the U.S. are primarily overseen by state regulators. Benjamin Lawsky, New York’s superintendent of financial services, said in a July 30 letter to Lew that MetLife’s insurance businesses already are “carefully regulated” by his department and that the company “does not engage in non-traditional, non-insurance activities that create any appreciable systemic risk.”
SIFIs Designated
Prudential Financial Inc., American International Group Inc. and General Electric Co.’s finance unit were designated non-bank SIFIs last year.
Prudential’s challenge to its designation was rejected by FSOC, and the Newark, New Jersey-based insurer opted against contesting the risk label in court. AIG and GE Capital didn’t request hearings.
The Treasury said that the council’s Sept. 4 proposal to designate MetLife was unanimous with one member voting “present.” A two-thirds vote, including Lew’s, is required to designate, meaning at least three members would have to change votes for MetLife to succeed. When Prudential was given the risk label last year, the council voted 7-2 in its proposed designation and upheld that by the same count.
MetLife’s Strategy
While it’s unlikely MetLife could change enough votes on the council to reverse the proposed designation, requesting the hearing is part of the insurer’s broader strategy, said Joseph Engelhard, a former Treasury Department and congressional aide who is now senior vice president at Washington-based consultant Capital Alpha Partners LLC.
“It allows MetLife to share its perspective and get more clarity from regulators on what makes it systemic,” Engelhard said. “The company also might be able to learn what it would have to do in the future to get out of the systemic designation.”
FSOC was created by the Dodd-Frank Act and given the authority to subject non-bank firms to extra oversight. The law, passed to avoid a repeat of the financial crisis, also increased supervision of the largest U.S. banks.
U.S. lawmakers have been working to give the Fed more flexibility in how it oversees systemically important insurers by modifying a portion of Dodd-Frank known as the Collins amendment. MetLife’s decision on whether to take its fight to court may depend on whether Dodd-Frank is modified, said Isaac Boltansky, an analyst at Compass Point Research & Trading LLC.
