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The life insurance giant became the second firm to seek an opportunity to contest its designation as "systemic" by the Financial Stability Oversight Council.
October 3 -
Pushback by the Securities and Exchange Commission is complicating a regulatory effort to investigate whether large asset managers should be labeled "systemically risky."
June 13 -
The Financial Stability Oversight Council plans to regulate the asset management industry by targeting activities that pose systemic risk rather than the companies themselves. Regulators should take the same approach with life insurers, according to former U.S. Sen. Dirk Kempthorne.
August 22 -
MetLife, which has 30 days to request a hearing to contest its designation, said it "strongly disagrees" with the decision of the Financial Stability Oversight Council.
September 4
"We have to be allowed to ask questions," Treasury Secretary Jack Lew
At Monday's
The details of the FSOC's rationale for making a
MetLife has announced plans to
Therein lies the biggest problem with the council's designation process. According to my discussions with insiders at multiple designated institutions, the council has never outlined the steps that these institutions need to take to remove their designation.
Insiders say that the confidential justifications for council designation are very general and mostly involve speculation about how the designated firms' investors and policyholders would react in an imaginary crisis scenario. The assumptions about insurance policyholders' reactions are not based on historical evidence from the industry. Rather, the arguments seem to assume that insurance customers will react like bank depositors and withdraw all their resources, even though early policy redemption costs and state insurance safety nets make such behavior foolhardy in practice.
Two insurance companies American International Group and Prudential Financial have now been designated for more than a year. According to the provisions of the Dodd-Frank Act, designations should be reviewed annually. AIG's designation was renewed by the council over the summer and Prudential's designation is up for review this fall.
Secretary Lew and the FSOC should ask the Federal Reserve some hard questions before renewing Prudential's designation. After a year of detailed enhanced prudential scrutiny, surely the Fed can offer a more specific justification as to what features make Prudential systemically important. It is unclear whether the Fed has worked with Prudential on a plan that would remove its designation, or if the council and the Fed have even discussed with Prudential's management the steps it must take to remove itself from the systemically important list.
Moreover, Congress should ask Secretary Lew to share the specific requirements that the council has given to each designated institution about what changes would enable them to rid themselves of the SIFI label. The Dodd-Frank Act makes no presumption that council designation is permanent, yet the council and regulators do not appear to have provided a path to a cure.
In the available public record or in discussions with industry insiders, I am unaware of any evidence that the council or the Federal Reserve has been actively working with companies to reduce the size of the designated institutions list. I think even Secretary Lew would agree that Congress has a right to ask the council for this information. More importantly, I hope that the council appreciates the necessity of providing the Congress with a credible answer.
Paul H. Kupiec is a resident scholar at the American Enterprise Institute. He has also been a director of the Center for Financial Research at the Federal Deposit Insurance Corp. and chairman of the Research Task Force of the Basel Committee on Banking Supervision.