Now that MetLife has completed its deregistration from bank holding company status, its attention turns to the next phase of its regulatory gameplan, trying to convince regulators that it does not have the stature of a Systemically Important Financial Institution (SIFI). A Bloomberg article today had some interesting quotes from MetLife executives regarding the challenges the company faces should it receive the SIFI designation.
The company is trying to make a business case for why it should be exempt from such a designation. They claim not to be systemically-linked. One wonders whether AIG would have made the same claim pre-collapse.
As noted in last week’s post, less than six months ago, MetLife was the sixth-largest bank holding company, behind Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Goldman Sachs. While admittedly the firm has been shedding assets and paring business lines (e.g., its exit from long-term care insurance), it is hard to believe that much has changed to alter the level of its systemic importance. It participated in the 2009 stress tests that the Fed conducted among 19 of the largest financial institutions and has continued to be included in the annual Comprehensive Capital Analysis and Review (CCAR) exercises that have been held since then, failing the most recent one (the results of which were released in March 2012). Results from the most recent stress tests are scheduled to be released in two parts; the first (stress tests using scenarios mandated by Dodd-Frank) will be released tomorrow (March 7) at 4:30pm while the results of the new CCAR will be released one week later (March 14 at 4:30pm).
The above-mentioned article quoted one executive as saying that increased costs [associated with the SIFI designation] would force the company to raise prices, inhibit risk-taking, and curtail business activities. These remedies are exactly what one would expect in the face of challenging economic times ahead.
MetLife is understandably frustrated at the extent to which they perceive regulators to be inhibiting their ability to do what they want since as a result of their CCAR failure, MetLife’s proposed capital plan was rejected by the Fed. Yet forcing large companies to recognize the negative externalities that could result from their actions is an important part of ensuring financial stability and the central principle behind SIFI designation.
The argument that MetLife has a very different business model from many other SIFIs has its merits. But that point should be part of a larger debate regarding the inclusion of the insurance industry as a whole. If its industry peers are included, so should MetLife be, regardless of whether it is a bank holding company or not.
Click here for more on the Fed’s capital planning and stress testing program (links externally to the Fed website).
Click here for more on the Fed’s release dates of the supervisory stress tests and the CCAR.