Last Week, the US Government filed an appeal court document for the MetLife case in which district court judgment overturned MetLife (NYSE: MET) saying the company should be designated a SIFI or systematically important financial institution by the FSOC (Financial Stability Oversight Council).
On December 2014, MetLife was designated a non-bank SIFI under the Dodd-Frank Act that Obama administration passed in 2010, in an attempt to prevent the recurrence of events that caused the 2008 financial crisis. SIFIs face stricter regulations compared to smaller firms, including capital and leverage requirements.
MetLife was the only financial group to fight the US government in the courts. If the government fails in its appeal, a higher court ruling may boost other SIFIs’-such as AIG and Prudential Financial.
“If the government were to lose on appeal it would be earthshaking,” says Robert Hockett, a Cornell Law professor. “It would set a significant [legal] precedent.”
In her ruling, the US district court Judge Collyer found that US authorities “never projected what the losses would be, which financial institutions would have to actively manage their balance sheets, or how the market would destabilize” if the insurance company failed. Furthermore, she ruled it was a problem that the FSOC did not consider the costs of the SIFI label to MetLife. But the FSOC debates that it would be an “impossible” task to estimate specific losses to other companies if MetLife were to come under distress and that a financial crisis often spurs sudden and unforeseen failure.
MetLife continues to divest a large part of its business both to reduce regulation cost of SIFI and to take into consideration regulatory uncertainty. The company will file a response to the appeals court by August 15, said by MetLife spokesperson Randy Clerihue in an e-mail, according to Insurance Journal.