By Ben Edwards
MetLife shed its too-big-to-fail label at the end of March after a judge ruled that the Financial Stability Oversight Council’s method for making the designation was flawed because, in part, it had not considered the financial cost such a label would incur on the insurance giant.
The FSOC is scrambling to appeal the US district court’s decision in what, if it loses, could have far-reaching implications on how financial regulations are introduced.
“If MetLife wins [on the cost ground]” says Margaret Tahyar, a partner at US law firm Davis Polk & Wardwell, “it’s going to have a very large impact not only on systemic designations but possibly on other prudential regulations, because what it says is you can’t impose a large new regulatory burden on a company that will cost the company and its shareholders money and refuse to consider those costs at all.”
MetLife is one of 12 non-banks deemed to be systemically important by Dodd Frank’s FSOC. They include two other insurers (AIG and Prudential) GE Capital Corp, and eight other financial market intermediaries.
Part of the problem for the government is that MetLife was designated a non-bank systemically important financial institution (Sifi) before the Federal Reserve had set the regulations the insurer would be bound by. The judge also found that FSOC had not followed its own guidelines when stress-testing MetLife. Depending on who is on the appeals panel, there is a strong chance of MetLife having that part of the ruling upheld, Tayhar adds.
For now, MetLife is no longer deemed too big to fail, but because the regulatory burden of a non-bank Sifi designation is still unknown, analysts say it is difficult to assess how the ruling will impact the company other than it not having to worry about setting aside additional capital in the future or being subject to stricter Federal oversight.
Equity investors are likely to be more jubilant however as any regulatory constraints the Fed eventually decided to impose could have meant lower dividends for shareholders or precluded MetLife from pursuing large transformational M&A deals, says Rob Haines, a senior analyst at CreditSights.
But despite the court’s decision to reverse the designation, a possible sale of MetLife’s US retail business is still on the cards, something that would shrink the company and potentially make the Sifi designation redundant.
“They have said in the past that the sale is not dependent on the Sifi designation, so we think they are still going to move forward with the sale,” says Haines.
What implications the ruling will have on other non-bank Sifis is still unclear. General Electric, for instance, has already asked the government to reconsider the designation of its investment unit GE Capital, arguing that it has substantially pared back that part of its business.
For AIG and Prudential, the other two major US insurers captured by the Sifi regulations, the picture is mixed.
Activist shareholders at AIG have been pushing for the firm to divest parts of its business, in part to be able to slip under the Sifi radar. Prudential, meantime, has been sitting back and waiting to see how the regulation unfolds.
“This whole time [Prudential] have basically said they are comfortable with their business mix, they don’t see any reason to take any action, but now that MetLife has won the legal argument they’re probably going to start exploring their options,” says Joshua Esterov, a senior analyst at CreditSights. “But they’re probably perfectly set to let MetLife spend all their money on the legal play rather than contesting it simultaneously.”
The decision may also cause the FSOC problems when it undertakes its annual Sifi reviews.
“[Other non-bank Sifis] might decide to push a little harder at that annual re-evaluation, and for those that have not been designated but might be, it’s a clear signal they can fight hard,” says Tahyar.
Even so, being free from the government’s too-big-to-fail shackles is not the end of the regulatory burden for the insurers — all three firms are designated as Global Systemically Important Insurers by international regulator the Financial Stability Board, rules that are also yet to be confirmed.
“It’s not like they can get out from under this and then do what they like, they’re still going to have significant regulatory hurdles they’re going to have to meet,” says Haines. “This is an ongoing story.”
How the US part of that too-big-to-fail story develops now rests with the appeals court, and that process will take time.“We should know later this year what the result will be, it’s a pretty significant decision so they’re not going to rush it,” says Jerry Blanchard, a partner at US law firm Bryan Cave. “But it’s difficult to say how it will play out. It could go either way.”