MetLife is challenging
its designation as a nonbank systemically important financial institution (SIFI). Dodd-Frank created the Financial Stability Oversight Council (FSOC) which comprises the heads of federal financial regulators and a voting insurance specialist and is chaired by the Treasury Secretary. So far, three insurance companies, Prudential, AIG and MetLife, have received the nonbank SIFI designation. However, MetLife is the first to take advantage of the judicial review provision in Dodd-Frank.
provides that within 30 days of a final determination by the FSOC. A nonbank financial entity can seek judicial review of the SIFI designation in either the United States District Court in the district where the entityaEUR(TM)s home office is located or in the United States District Court for the District of Columbia. MetLife is filing its case in the D.C. District Court. As with other judicial review appeals of administrative determinations, the party seeking judicial review must demonstrate that the determination is arbitrary and capricious.
The SIFI designation is given to entities the FSOC believes are so large and intertwined with the financial system that, if that institution was to fail, it would have systemically negative consequences. There are several outstanding issues with designating insurance companies as nonbank SIFIs. One of these issues
rests with the additional regulatory oversight these companies will face. All SIFIs are regulated by the Federal Reserve Bank and are subject to additional capitalization standards. However, the current SIFI standards
are designed around the banking business model, not insurance companies, though there are steps being taken to address this difference. Due to the different business models and increased capitalization standards, there is a concern
that these new requirements will result in higher premiums for customers.
In addition, Peter J. Wallison at the American Enterprise Institute notes
several problems with the designation process in general, especially as applying the SIFI designation to MetLife. There is a concern that size is playing a disproportionate role. While size is an important consideration for determining whether a bank is systemically important, it is not as important for insurance companies. He argues that insurance companies are actually more stable the larger it is because its stability rests on pooling together a large number of diverse risks.
This is a very important test case as it is the first time the nonbank SIFI designation has been challenged. In addition, this case could also shed important light on how the FSOC is currently making these determinations. Finally, how the court rules could potentially influence how the FSOC makes these determinations in the future. Only time will tell.
MetLife v. Financial Stability Oversight Council