MetLife’s surprise announcement that it was going to divest itself from several of its business lines is widely seen as a response to its designation in late 2014 as a systemically important financial institution.
MetLife was just the fourth nonbank named by the Financial Stability Oversight Council as a SIFI, and the second to shortly thereafter announce plans to break itself up.
“You’ve now seen two of the four firms that were designated actively take steps to restructure their business. That to some degree means that Dodd-Frank is working as intended,” said Aaron Klein, director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative…
Karen Shaw Petrou, managing partner of Federal Financial Analytics, said that even if MetLife stays a SIFI, the oversight council will probably face greater pressure to define its off-ramps for designation.
“It certainly will require FSOC to take a fresh look at de-designation, which I think it would otherwise not be been prepared to do in next year or two,” she said.
For his part, the Bipartisan Policy Center’s Klein says that regardless of whether MetLife seeks de-designation, if one believes that the company’s actions have reduced its systemic risk, then its actions should be applauded.
But the episode reveals some structural shortcomings of the SIFI designation process — namely that the question of how much systemic risk is too much is a subjective question and the determination is binary. If a company — be it MetLife or some other nonbank SIFI — makes an attempt in the future at reducing its systemic risk but finds its moves rebuffed, “it would indicate a lack of communication and understanding between the FSOC and the companies,” Klein said.