MetLife has filed a lawsuit in an attempt to undo its designation as a non-bank Systemically Important Financial Institution by the Financial Stability Oversight Council. marks the first time a SIFI designation has been challenged before a federal judge
“We had hoped to avoid litigation after we presented substantial and compelling evidence to FSOC demonstrating that MetLife is not systemically important,” MetLife CEO Steven Kandarian said in a statement.
Created by the Dodd-Frank Act, FSOC is comprised of federal and state regulators and an independent insurance expert appointed by the President. SIFIs are required to conduct regular stress tests, prepare credit exposure reports, and draft “living wills” that document resolution and liquidation plans. They may also face enhanced prudential standards, including requirements regarding risk-based capital and leverage, liquidity, risk management, early remediation, and credit concentration.
MetLife’s designation was made at a Sept. 4 FSOC meeting, making it the fourth non-bank to receive SIFI status. Similarly designated banks include Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup, Bank of America, Merrill Lynch, and Wells Fargo.
MetLife’s lawsuit challenges both the specifics of its designation and the general approach taken by FSOC. The company rejected the notion that it could pose a threat to U.S. financial stability calling that conclusion “arbitrary and capricious” and “reached through a procedure that denied MetLife its due process rights and violated the constitutional separation of powers.”
Among the claims presented in the lawsuit:
“FSOC made “numerous critical errors” that fatally undermined the reasoning in its final designation. It failed to understand, or give meaningful weight to, the comprehensive state insurance regulatory regime that supervises every aspect of MetLife’s U.S. insurance business.
FSOC fixated on MetLife’s size and so-called interconnections with other financial companies—“factors that, considered alone, would inevitably lead to the designation of virtually any large financial company”—and ignored other statutorily mandated considerations that weighed sharply against designation.
“FSOC consistently relied on vague standards and assertions, unsubstantiated speculation, and unreasonable assumptions that are inconsistent with historical experience, basic economic teachings, and accepted principles of risk analysis.”
“FSOC wholly ignored the tools used by federal regulators to assess the potential impact of severely adverse economic conditions in other contexts, including Federal Reserve Board ‘stress tests.’”
FSOC denied MetLife access to data and materials used to make its designation, depriving the Company of an opportunity to rebut assumptions and respond to its analysis. This violated the firm’s due process rights, the suit says.
MetLife also argued that it is not predominantly engaged in financial activities and FSOC’s designation authority is limited by the Dodd-Frank Act to “U.S. nonbank financial companies.” MetLife is not a “U.S. nonbank financial company” eligible for designation, the lawsuit says, because it derives more than 15 percent of its revenues from, and more than 15 percent of its assets are related to, insurance activities in foreign markets.
The company adds that FSOC had “an obligation to consider reasonable alternatives to designating MetLife as systemically important.” Those alternatives include the “activities-based approach” FSOC is presently considering for asset managers. It would impose enhanced supervision on certain activities deemed to be particularly risky, without designating the entire company as systemically important. Despite “the repeated statements of key legislators and federal financial regulators that traditional insurance activities do not pose systemic risk to the economy,” FSOC provided “no reasoned explanation for failing to pursue an activities-based approach for insurance companies.”
In a more general criticism, MetLife called the designation process “opaque” and objected to “procedural shortcomings that severely impaired its ability to respond.”