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Nonbank SIFI "Dragnet" for Fed Supervision Targeted at Hill Hearing

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Metropolitan Life Insurance Co., Americas, President William “Bill” Wheeler told a House panel in no uncertain terms that it does not believe insurers should be regulated like banks and warned against marketplace distortion should the final federal capital enhancement rules not be crafted well–or even if they are and insurers are designated as too big to fail by the Financial Stability Oversight Council (FSOC).  

Wheeler said that, having lived with Federal Reserve regulation, MetLife had been “forced to stand on the sidelines as nearly all of MetLife’s competitors– including those that took federal bailouts – returned capital to shareholders while bank-centric rules prevented the largest life insurance company in America, from doing so.”

Wheeler testified before the House Financial Institutions and Consumer Credit Subcommittee of the House Financial Services Committee on May 16. 

MetLife owns a bank and is therefore subject to the Federal Reserve supervision. It is trying to shed its bank, but may still potentially be considered a systemically important financial institution (SIFI) under the Dodd Frank Act guidelines and thrown back under Fed supervision. These guidelines were the crux of the hearing. 

Wheeler objected to designating a handful of insurance companies as SIFIs because it would upset the insurance industry balance in the United States.

The government will be “picking winners and losers in the insurance industry,” Wheeler warned lawmakers. 

On the one hand, SIFI insurers may get a competitive advantage for being perceived as too big to fail, and have better ratings and better access to lower-cost money, but shareholders may pay the price, according to Wheeler.

These SIFI insurers “would have to hold more capital and maintain higher liquidity levels, which would reduce returns on equity for shareholders and impose higher prices on customers. In addition, they would have to deal with two levels of regulation compared with one for the rest of the industry,” Wheeler testified. 

“Naming only a few large insurance companies as SIFIs is an unsettling thought – it would needlessly upset the competitive landscape in the insurance sector and possibly discourage these large insurance companies from offering the insurance products average Americans rely upon as part of their financial planning,” he testified.

“Even in the event of insolvency, we would not “threaten the stability of the financial system of the United States,” Wheeler testified. 

If there are to be insurer SIFIs, then it is “imperative for regulators to get the prudential rules for non-bank SIFIs right. At the very least, they should regulate insurance companies as insurers, not as banks,” Wheeler told Congress.

House lawmakers expressed concern and a need for clarity about designating nonbanks as SIFIs, with the chairman of the  Financial Institutions Subcommittee  was even asking if the Federal Reserve System even had the “expertise” to regulate  non-bank firms from different industries.

Rep. Shelley Moore Capito, R-W.Va.,  the panel’s chairman, said there are “legitimate questions” about standards for designating a SIFI and how new standards will work once a non-bank firm is designated. 

“How well have the FSOC and the Federal Reserve coordinated to ensure the standards for (SIFI) designation and supervision are in harmony? Are they working with their counterparts across the globe to harmonize the standards [for SIFIs and global (G-SIFIs)?], Capito asked in her opening statement. 

Subcommittee Ranking Member Rep. Carolyn Maloney D-N.Y., grilled officials from the Federal Reserve and the U.S. Treasury on different models for treating insurance companies, which are

very different from banks, she said.

Rep. Donald A. Manzullo, R-Il, zeroed in on the meat of the Subcommittee’s concerns on insurance (some New York and other lawmakers focused on asset management firms as SIFIs). 

Will MetLife be a SIFI, he asked, and regulated by the Fed?

MetLife is regulated now by the Fed because they have a bank holding company, the Board of Governors of the Federal Reserve Division of Banking Supervision and Regulation Director Michael Gibson retorted.

But once it sheds its bank, MetLife will no longer be regulated by the Fed, Manzullo asked. Gibson agreed.

Manzullo asked then whether the FSOC plans to have MetLife designated a SIFI and bring it back to Fed regulation. “I don’t know whether the Council plans to designate it or not,” Auer said.

 “What do you think–they pose no systemic risk,” Manzullo said, referring to MetLife. “So should not be regulated under this new regulation.”

“It is up to FSOC,” Gibson retorted.

Manzullo asked the Treasury’s Auer about the “SIFI dragnet”  that the FSOC is operating to  sweep other nonbank firms into the Fed’s supervisory arena.

 Rep. Michael G. Grimm, R-N.Y. told the government panel that Manzullo’s questions hit to the heart of the matter and that “the uncertainty is getting worse.”

Maloney of New York also asked how FSOC will evaluate a firm’s s interconnectedness in determining whether it is a SIFI. 

There is no formula or metric for determining interconnectedness among financial institutions, said Auer. It is one of the measures the Council will look at, but firms may have interconnectedness in different ways, he said. The FSOC will look at whether a company’s interconnectedness poses a threat to the financial stability of the United States, Auer said.  

Lawmakers also wanted a timetable for determining SIFI. 

Auer explained the three-step process and noted that the FSOC criteria for SIFI designations published in April and went into effect this month, and FSOC is now in Phase 1, collecting data from firms and making sure it is accurate. 

 The first of designation of SIFI is expected sometime this year. 

It is expected that less than 50 firms will pass the Phase 1 threshold but that is not definitive, and phase one metrics are just a screening device. 

“I think it would be premature and inappropriate to speculate” on how many firms will be designated as SIFIs, said Lance Auer, deputy assistant secretary for financial institutions at Treasury. 

The initial screening threshold for the FSOC is a firm with $50 billion in total consolidated assets and having one or more of another set of quantitative financial criteria capturing such instruments as or positions in swaps, derivatives, leverage and loans.

Gibson said the Federal Reserve does intend to consider tailoring the capital standards to companies from other sectors, once firms are designated a SIFI. –Some firms may be a bad fit and we are doing what we can to tailor the standards. Then other companies that are not that different from a bank and for those companies, there would not be that much tailoring, Gibson said. 

Gibson said he believes the Federal Reserve does have “sufficient expertise” to supervise nonbank firms, in response to Capito’s queries, and noted that if it needed more expertise, it would bring it in.   

Lawmakers wanted assurance the federal regulators would work with sate and other federal regulators.

House Financial Services Chairman Spencer Bachus, R-AL, asked the government panel if it would work with state insurance regulators.

“Yes, we already do,” Gibson said. Gibson also said the Fed was working with Treasury’s Federal Insurance Office (FIO) on banks with insurance companies.

Auer noted that FSOC has three members with insurance expertise. 

“We do expect to be working with state insurance regulators so we can understand the unique nature of these firms,” Auer said.

As for the FDIC’s orderly liquidation authority, lawmakers asked for some confidence that the FDIC has the expertise to unwind nonbank institutions. Treasury’s Auer said it had been working with FDIC on this. 

Wheeler also told lawmakers later that insurance company financial distress occurs far less frequently than bank distress and said that he did not think that two of the three insurers who received taxpayer assistance through the Troubled Asset Relief Program, compared with 592 banks who did actually need it “to prevent any sort of systemic event.”

 The three insurers that received TARP funds were AIG, The Hartford and Lincoln National Corp.


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