MetLife Not a SIFI: What Does Decision Mean for the FSOC?
A recent court decision overturning the Financial Stability Oversight Council’s (FSOC) designation of MetLife as a systemically important financial institution (SIFI) has further eroded confidence in the effectiveness and authority of the FSOC. Created under the Dodd-Frank Act, the FSOC was given the mandate of identifying and responding to emerging threats to financial stability. One of its first acts in reviewing large nonbank financial companies was to designate insurer MetLife as a SIFI in December 2014, which subjects the company to higher capital requirements, among other things.
The DC District Court’s assessment that the FSOC’s reasoning and process in designating MetLife a SIFI was “fatally flawed” raises important questions about how the FSOC fulfills its mandate. In addition, the court’s characterization of the FSOC’s actions as “arbitrary and capricious” and not in keeping with its own guidelines has fueled ongoing criticism of the FSOC’s power, reach, and lack of transparency. Although Secretary of the Treasury, Jack Lew, defended the FSOC’s designation authority “as a critical tool to address potential threats to financial stability,” others have questioned whether the court decision raises significant questions about the FSOC’s future ability to designate SIFIs.
FSOC Under Fire Before
In late 2014, the Government Accountability Office (GAO) issued a report documenting weaknesses in the FSOC’s processes. It suggested that more work was needed in three areas: (1) transparency and accountability, (2) identifying emerging threats and risks, and (3) collaboration and coordination. The report follows a September 2014 report in which the GAO said that the FSOC lacked a “comprehensive, systematic approach to identify emerging threats to financial stability.” In February, the GAO reported that the US regulatory structure is fragmented, there are overlapping duties among regulators, and Congress may need to legislate changes to better align the FSOC’s authority with its mandate to respond to systemic risks.
And we cannot forget the industry outcry when the Office of Financial Research, which serves at the behest of the FSOC, issued its report on Asset Management and Financial Stability in September 2013. That report was widely denounced as uninformed and lacking an understanding of the asset management industry. (CFA Institute provided a formal comment letter that questioned some of the report’s underlying assumptions.) Undeterred, the FSOC issued a request for public comments on the systemic nature of the asset management industry in December 2014, prompting yet another comment letter by CFA Institute.
FSOC Presses Forward
Despite the controversy, the FSOC continues to move forward in identifying areas in the marketplace that it tags as potentially systemically risky. Most recently, it renewed its focus on the asset management industry in five specific risk areas: liquidity and redemptions (especially with respect to mutual funds), leverage, operational functions, securities lending, and the resolution and transitioning of a large, global asset manager.
An effort by Congress to reform the FSOC passed out of the House of Representatives in mid-April. But what about MetLife’s win? As of today, the FSOC’s website still lists MetLife as a designated SIFI. Not one to give up lightly, the Treasury Department has indicated it will appeal the court’s decision.
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