
By Peter Wallison.
The Financial Stability Oversight Council announced last week that it had preliminarily designated MetLife, the nation’s largest life insurer, as a systemically important financial institution, or SIFI. This means that the FSOC, established after the financial crisis by the 2010 Dodd-Frank law, believes the financial distress of MetLife could threaten the U.S. financial system.
MetLife has a chance to appeal, but if the designation is finalized, the insurer will be subject to banklike regulation from the Federal Reserve, though the Fed has never regulated an insurance company nor said how it would do so.
The FSOC is composed of the heads of nine federal financial regulators and one independent presidential appointee, with the Treasury secretary as chairman. It embodies the underlying premise of Dodd-Frank: The financial crisis was caused by insufficient regulation. Although several heavily regulated banks failed in the crisis, the FSOC was given the authority to single out nonbank financial firms for similar supervision.
This phenomenon is not limited to the U.S. In 2009, the G-20 leaders deputized the Financial Stability Board—a largely European organization of central bankers and bank regulators—to reform the international financial system. The Financial Stability Board has no enforcement powers, and so it relies on regulatory organizations like the FSOC to enforce its writ.
Both the Treasury and the Fed are influential members of the Financial Stability Board, and, not coincidentally, the board decided to designate certain nonbank financial firms as global SIFIs. In July 2013, the board designated AIG, Prudential and MetLife as SIFIs. The FSOC quickly followed suit with AIG and Prudential, but only last week got around to MetLife.
Yet MetLife’s designation was a foregone conclusion. Though the FSOC “investigated” whether MetLife should be deemed a SIFI for more than a year, the council would not overturn a decision the Financial Stability Board, the Treasury and the Fed had already approved.
The sham of the FSOC’s designation process became clear recently when, in a hearing before the House Financial Services Committee, Treasury Secretary Jack Lew was unable to explain how the FSOC could conduct a fair and objective investigation of MetLife when he himself—as a member of the Financial Stability Board and chairman of the FSOC—had already approved the Financial Stability Board’s designation of MetLife as a global SIFI.
When the FSOC finally publishes the basis for the MetLife decision, after the administrative hearing process ends, it will likely resemble the justification paper for the FSOC’s 2013 Prudential designation. If so, the justification paper will not explain to the public or other insurers why MetLife deserves designation as a SIFI.
Indeed, the FSOC’s only guidepost seems to be that the Financial Stability Board did it first. Not surprisingly, the FSOC’s only insurance expert, Roy Woodall, dissented from the final Prudential decision.
Fortunately, Congress has at last become aware of the FSOC’s arbitrary decision-making. In July nine members of the Senate Banking Committee, led by Sens. Pat Toomey (R., Pa.), Mike Crapo (R., Idaho) and Richard Shelby (R., Ala.), sent an open letter to Mr. Lew urging the FSOC “to suspend any further SIFI designation” because “the FSOC is consigning financial firms to stringent regulation by the Federal Reserve without knowing how these firms will be regulated.”
House Financial Services Committee Chairman Jeb Hensarling (R., Texas) has also called on the FSOC to “cease and desist” further designations until Congress has evaluated the economic effects of designating a nonbank financial firm as a SIFI. The House backed Mr. Hensarling in July by passing an appropriations-bill amendment that imposed a one-year moratorium on SIFI designations.
The FSOC hasn’t been completely deaf to congressional complaints. In a meeting at the end of July, the agency directed its staff to focus on the “activities and products” of asset managers, rather than on whether they should be individually designated as SIFIs. This was a climb-down from the more high-handed position it had taken in the past.
That was important for another reason: It could stymie the Financial Stability Board’s campaign to regulate “shadow banks,” which the FSB defined as asset managers, mutual funds, securities firms and hedge funds. The Financial Stability Board moved to regulate so-called shadow banks when it declared in a January 2014 report that asset managers with more than $100 billion under management should be investigated for SIFI designation.
If the FSOC follows the Financial Stability Board’s script, it would place the largest asset managers under the Fed’s purview, giving the central bank an opportunity to determine what activities they finance. This could seriously impair the financing available to U.S. companies.
It may be a head fake, but if the FSOC has set aside implementing the Financial Stability Board’s shadow-bank regulation, that would be good news. Whether it becomes a permanent retrenchment may depend on whether the midterm elections move the Senate away from the highly regulatory approach that was the essence of Dodd-Frank.
Mr. Wallison is a senior fellow at the American Enterprise Institute.
