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December 19, 2014 at 08:36 AM
(Bloomberg View) — MetLife is not going quietly into systemic importance, and continues to rumble about seeking judicial review even after the Financial Stability Oversight Council yesterday designated it a “systemically important financial institution.” I have some sympathy: For one thing, life insurance, as a business, really isn’t subject to the run-type risks that make banks dangerous.
For another, it’s all well and good to say that the designation “subjects MetLife to stricter Federal Reserve oversight that could include tougher capital, leverage and liquidity requirements,” but the fact is that the Fed actually knows how to regulate systemically important banks — it has lots of capital rules and does examinations and so forth, and has done that for decades — but is less clear on how to regulate systemically important insurers.
Insurance is basically state-regulated, and federal rules for the capitalization, etc., of systemically important life insurers are considerably more vague and inchoate than they are for banks. MetLife is not just objecting to stricter regulation, it’s objecting to regulation by a novice regulator. But! MetLife’s problem is basically AIG, which, like Prudential, has already been designated a SIFI, and without objection. You can go around saying “life insurers don’t have run risks like banks,” but the answer to that is “AIG.” Or you can say “but insurers are already well regulated by state insurance commissioners,” but, again, “AIG.”
Financial regulatory delays and reversals
Feels like there’s a bunch of them? The Fed is giving banks two more years to comply with the Volcker rule’s limits on investments in hedge funds and private equity funds; the new deadline is basically July 2017 (I mean, it’s July 2016, but ”The Board also announced its intention to act next year to grant banking entities an additional one-year extension of the conformance period until July 21, 2017.” It’s that famous Fed clarity!)
Paul Volcker is, of course, not amused — “It is striking that the world’s leading investment bankers, noted for their cleverness and agility in advising clients on how to restructure companies and even industries, however complicated, apparently can’t manage the orderly reorganization of their own activities in more than five years” — and I suppose he’s right. The Volcker Rule limit on investing in hedge funds and private equity is notably silly; it basically prohibits banks from owning between 3 and 99.9 percent of such funds, but 100 percent is fine, and it is hard to see why owning 30 percent of a private equity fund is riskier than owning 100 percent (that’s a little unfair. Here’s my best guess at an explanation).
Nonetheless, Volcker — the guy not the rule — has a point: This is not that hard to implement (though the prop-trading ban in his rule might be!), so it’s kind of unimpressive that it’ll take an extra two years.
Elsewhere, here is Dan Davies on the swaps push-out, arguing that banks’ bitter fight against the push-out was not about credit but about liquidity. Derivatives businesses are mostly collateralized, so credit doesn’t matter that much, but “access to Federal Reserve monetary operations” to backstop your ability to post collateral does. But how much does it matter? Davies:
Securities dealers had de facto access to the discount window in the crisis, through a variety of lending facilities, and it looks very much as if this is going to be institutionalised going forward. So, even if the “push out” had been enacted, it seems likely to me that the derivatives industry would have ended up getting access to liquidity support when it needed it.
I’m with Davies: Insured depository bank subsidiaries have formal advantages (FDIC insurance, discount window access) over non-bank subsidiaries. But derivatives dealer banks are big and concentrated and interconnected, and there is not much reason to think that, if one of them got into trouble, it wouldn’t (or shouldn’t!) have informal access to most of the same advantages.
Davies concludes that the push-out would have been annoying for banks, and “it’s not obvious what the countervailing benefit to society would have been — certainly not the ability to allow a great big financial market to collapse without public involvement.”
Also, here is a story about the anti-Citigroup backlash from the swaps push-out fight. And the Securities and Exchange Commission is implementing some delayed, and kind of boring, JOBS Act rules. And Ben Lawsky has revised his proposed BitLicense rules, and one possibility is that BitLicense will be finalized on the exact day that bitcoin stops being a thing.
Today in Russia
Seems … not so good? “The efficiency of the interbank lending market has declined,” for one thing, which means among other things overnight interbank lending rates in the high 20s, and the banks may require government support. Which appears to be on its way: Russia’s parliament is pushing through a law ”that would give the banking sector a capital boost of up to 1 trillion rubles ($16.5 billion) on Friday, part of measures to shield banks from Western economic sanctions.”
