MetLife receives preliminary SIFI designation from FSOC

Washington, Sept. 4 — After more than a year of review, the Financial Stability Oversight Council (FSOC) voted today to preliminarily designate MetLife, the country’s largest life insurer, a nonbank systemically risky financial institution or SIFI, and the insurer said it is weighing its options.
The Council’s vote was unanimous with one member voting present. AIG, when it was designated, had an unanimous vote. Prudential Financial’s final designation vote was 7-2, with an abstention from the new SEC chairwoman.
“MetLife strongly disagrees with the Financial Stability Oversight Council’s preliminary designation of MetLife as a SIFI,” stated after the vote.

“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,”MetLife CEO Steven Kandarian continued in a prepared statement this afternoon.
The preliminary designation came in a closed meeting of the FSOC, over which U.S. Treasury Secretary Jacob Lew presides.

Construction of the US Treasury Building, 1857, image courtesy LOC

Construction of the Treasury Building, 1857, courtesy LOC


Kandarian said that MetLife is not ruling out any of the available remedies under Dodd-Frank to contest a SIFI designation.

Prudential Financial appealed the decision last year by the FSOC and lost but did not pursue the matter through the court system.

MetLife now has 30 days to request a hearing before the Council to contest the proposed determination. After any hearing, the Council may make a final determination regarding the company.

FSOC does not intend to publicly announce the name of any nonbank financial company that is under evaluation before a final determination is made.

Instead, MetLife did the talking today: “The current regulatory system oversees a stable industry that pays out more than $500 billion every year. Imposing bank-centric capital rules on life insurance companies will make it more difficult for Americans to buy products that help protect their financial futures. At a time when government social safety nets are under increasing pressure and corporate pensions are disappearing, the goal of public policy should be to preserve and encourage competitively priced financial protection for consumers,” Kandarian stated.
If assets are treated as short-term under accounting or capital rules, then insurers will not be there to buffer the risk they have taken on with huge pension plans, insurers have argued.
When and if New York-based MetLife is formally designated, it would be subject to enhanced prudential supervision from what (again) will be its primary regulatory Federal Reserve Board, with a host of accompanying  holding company oversight and capital standards, a yet to be worked out by the Fed.
The vote by the 10-member Council would not mean a proposed SIFI designation is official until MetLife is given a chance to respond, which may mean it decides to appeal or does nothing and the time-frame to respond elapses.

However, the most interesting part of MetLife’s potential designation will be the rationale used by FSOC. For example, for Prudential, last year, the FSOC majority started with the premise of an impaired insurer, with a run on the bank scenario, that many in the insurance industry–and the independent insurance expert, Roy Woodall, thought was implausible, according to his dissent.
Last year, FSOC determined that Prudential’s material financial distress could pose a threat to financial stability focusing on two of the channels: exposure and asset liquidation.
“The Council has based its conclusion solely on what is referred to as the First Determination Standard; namely: ‘material financial distress at the nonbank financial company could pose a threat to the financial stability of the United States,'” Woodall stated in his dissent.
Under Dodd Frank regulations, FSOC can, but does not require, that it begin with the company in distress and make determinations from there.
Passing that up brings the Second Determination Standard, dealing with the activities of an institution, into play.
“Given the questionable and unreasonable basis for the Council’s reliance solely on the First Determination Standard, it is my position that it would have been prudent for the Council also to have considered the Second Determination Standard pertaining to activities,” Woodall stated in the Prudential dissent of September 2013.
The fact that there were no dissents today–a ‘present’ vote is not a dissent–it appears the FSOC COULD have used the second determination route with MetLife.
Reaction from the Hill will certainly come, as some concerned lawmakers there have been attempting to stop FSOC in its tracks and have it reconsider SIFI designations until there is further disclosure on proceedings.
Rep. John K. Delaney, D-Md., a member of the House Committee on Financial Services,stated he had concerns about the process behind the MetLife designation, particularly regarding an alleged lack of communication and transparency.
“I generally support FSOC and its goals, but believe the details can be improved,” said Delaney, who, in July introduced with Rep. Dennis Ross, R-Fla., the FSOC Improvement Act (H.R. 5180) to address concerns about lack of transparency in the SIFI designation process.

MetLife, like its insurance SIFI brethren AIG and Prudential, is already designated as a global systemically important insurer (G-SII) by the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS), which is expecting to designate any global reinsurers it deems systemically risky this November.
MetLife has been regulated by the Fed before, back when it owned a bank. MetLife debanked in early 2013 in part to get out from under the Fed’s Tier One capital-focused oversight, where it was subject to stress tests it believed befit banks, not insurers.

Insurance trades were having none of what the FSOC delivered today.

The American Council of Life Insurers (ACLI) said it “is extremely disappointed” by the designation today of another life insurance company, MetLife, as a SIFI.

“No single life insurer poses a systemic risk to the U.S.economy,” it simply stated.
For its part, he Property Casualty Insurance Association of America (PCI)’s Robert Gordon, senior vice president, policy development and research, stated that “while a particular combination of facts, including the performance of non-insurance activities, may trigger a determination of systemic risk for an institution, such a determination does not alter the fact that property and casualty and other traditional insurance activities do not give rise to systemic risk.”
Rep. Scott Garrett, R-NJ), chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, who once tried to gain entry to a closed FSOC meeting, let loose on the preliminary decision: “Today’s irresponsible and inappropriate designation of another U.S. business as too-big-to-fail only strengthens my resolve to reform the out-of-control FSOC….This designation flies in the face of a unanimous, bipartisan vote in the House of Representatives to postpone any additional designations,” he said.
Garret and others have been engaged in a flurry of letter-writing over the past months to get answers from Lew and FSOC.

Yes, the book on MetLife is closed; vote on SIFI desgination next step

The Financial Stability Oversight Council voted Aug. 19 unanimously to close the evidentiary record on a what it says is a nonbank financial company, which we shall refer to as MetLife.
MetLife has been in Stage 3 of the review process for potential designation as a systemically risky financial institution (SIFI) for over a year.
Closing the books is the next step before the FSOC gathers in person or by phone to vote to potentially designate the largest U.S. life insurance company a SIFI, as it has for AIG, GE Capital and Prudential Financial, the second-largest U.S. life insurer. Prudential contested its proposed designation in an appeal, lost its bid and finally accepted it in lieu of a further battle and a higher standard of proof in the courts.
MetLife has long argued that it is not a SIFI, and it will be of interest to many to see whether the vote is unanimous or not.
The vote for Prudential was broken by three dissents, two from voting members Roy Woodall, the appointed independent member with insurance expertise, and Edward DeMarco, then acting chair of the Federal Housing Finance Agency (FHFA), and one from the representative from the state regulators, Missouri Insurance Director John Huff. The Securuties and Exchange Commission (SEC) had abstained in light of the recent Mary Jo White appointment.
When MetLife reached Stage 3 of the FSOC’s designation process in mid-July 2013, CEO Steven Kandarian stated that,
“I do not believe that MetLife is a systemically important financial institution. The Dodd-Frank Act defines a SIFI as a company whose failure ‘could pose a threat to the financial stability of the United States.’ Not only does exposure to MetLife not threaten the financial system, but I cannot think of a single firm that would be threatened by its exposure to MetLife.”

He argued against the scenario that the FSOC in large used that summer to finally designate Prudential, a run on the bank scenario.

“The life insurance industry is a source of financial stability. Even during periods of financial stress, the long-term nature of our liabilities insulates us against bank-like ‘runs’ and the need to sell off assets,” Kandarian said July 16, 2013.
“If only a handful of large life insurers are named SIFIs and subjected to capital rules designed for banks, our ability to issue guarantees would be constrained. We would have to raise the price of the products we offer, reduce the amount of risk we take on, or stop offering certain products altogether.”
MetLife is already a global systemically important insurer, as designated by the Financial Stability Board (FSB) after a review by the International Association of Insurance Supervisors (IAIS), as are AIG and Prudential.
The FSOC said in its resolution approving the completion of the record that “the nonbank financial company” has submitted written materials and information to the Council and the Office of Financial Research (OFR) and the staffs of the Council members and their agencies have analyzed such materials and information. The council member agencies are led by the Treasury Secretary or his designee. Including him, there are 10 voting members. They are listed here, by agency: http://www.treasury.gov/initiatives/fsoc/about/council/Pages/default.aspx
The OFR was planning on hiring more insurance expertise at one point, in the spring.