With the consent of the Trump Administration, on Thursday, January 18, 2018, the Financial Stability Oversight Council (FSOC), a Federal government organization established by Title I of the Dodd–Frank Wall Street Reform and Consumer Protection Act during the Obama administration, and MetLife jointly filed a motion with in the United States Court of Appeals for the D.C. Circuit. FSOC empowers the government to designate non-banks as SIFI’s, which subjects them to heightened supervisory requirements by the Federal Reserve.
The motion effectively ends a nearly two-year long legal battle between MetLife and Federal authorities and all but confirms the March 2016 U.S. Federal District Court ruling that reversed MetLife’s designation as a “Statutorily Important Financial Institution” (SIFI). Treasury Secretary, Steven Mnuchin said the decision to withdraw the case was “consistent with the recommendation by a majority of FSOC voting members” and added that the council would revise its non-bank designation rules to reflect the March 2016 lower court ruling in favor of MetLife. According to Mnuchin, from this time on, the non-bank designation rule and guidance will directly address the concerns identified by the District Court in the MetLife case.
In fulfilling a campaign promise of Donald J. Trump’s presidential candidacy, the Court of Appeals overturned the SIFI designation for, among other reasons, the fact that FSOC “never established a basis for a finding that MetLife’s material financial distress would ‘materially impair’ MetLife counterparties within the meaning of FSOC’s guidance.” In short, the Court said, it could not “affirm a finding that MetLife’s distress would cause severe impairment of financial intermediation or of financial market functioning – even on ‘arbitrary and capricious’ grounds– when FSOC refused to undertake that analysis itself.”
MetLife said in a separate statement late last week that it will file another joint motion in U.S. Federal District Court asking the District Judge to recant a part of her March 20, 2016 decision that found that FSOC had failed to conduct a “required benefit” analysis when labeling MetLife as systemically important.
After President Trump, in April 2017, ordered the Treasury Department to review FSOC’s process for putting the SIFI label on an institution, the appeal was suspended over pro-tests of a consumer group. Once designated as a SIFI, such firms would be subjected to enhanced supervision by the Federal Reserve, including enhanced capital, leverage, and liquidity standards, and annual stress testing. The goal was to prevent a company that was not a bank, from posing a threat to the broader financial system, as happened with the mere collapse of insurer, AIG, due to exposure to credit default swaps at the height of the financial crisis in 2008. Once the second motion is filed, “the parties will not be asking the district court to set aside any other aspect of its opinion,” MetLife said. “These motions will bring the litigation between MetLife and FSOC to an end and preserve the District Court’s ruling rescinding FSOC’s designation of MetLife.”
The other four non-bank financial firms designated SIFI’s escaped their designation through a process of selling off assets and other measures that made them appear a lesser risk to the broader financial system, in the eyes of regulators.
Future financial regulators will have a more difficult time targeting non-bank financial firms for extra regulation after the Trump administration agreed to include cost-benefit and other analysis in future designations of SIFIs. Future challenges by regulators to attempt tougher supervision under Dodd Frank will thus be more difficult, in many respects tying the hands of FSOC in the future.