Last month the Financial Stability Oversight Council dropped its appeal of a lower court decision striking down its designation of MetLife as a systemically important financial institution. This was the right move, as MetLife inherently is not a SIFI, and should never have been designated as such.
But this decision comes with a cost, as MetLife agreed to vacate the legal precedent requiring cost-benefit analysis for such designations – a process that should be mandatory when enacting sweeping regulatory action.
The lower court decision had found that FSOC’s decision to designate MetLife was “arbitrary and capricious,” in part because the council failed to perform a basic cost-benefit analysis in the process. The decision on the appeal was repeatedly delayed until FSOC and MetLife jointly moved to dismiss the appeal.
However, the agreement to file a motion to dismiss did not come without conditions. As part of the parties’ agreement to dismiss, MetLife also agreed, after the appeal is officially dismissed, to join FSOC in filing a separate motion to vacate a portion of the district court’s ruling. Unfortunately, that portion of the ruling is the portion regarding FSOC’s lack of a cost-benefit analysis that would have required FSOC, and likely other government bodies, to conduct a basic cost-benefit analysis when taking actions like designating companies as SIFIs. This was a wrong move, as cost-benefit analyses should be mandatory prior to sweeping regulatory action.
Hence the dilemma. On the one hand, the outcome of the case is correct: MetLife never should have been designated to begin with, as AAF has previously explained. But the lower court's precedent-setting decision recognizing that and requiring cost-benefit analyses going forward will now be vacated. So we have taken one step forward with MetLife as a specific entity, but several steps backward, in that future designations and actions will not legally be required to perform a cost-benefit analysis.
All hope is not lost, at least. In Treasury’s recent report on FSOC designations, it recommends that FSOC should revise its guidance to require a cost-benefit analysis and “should only designate a company if the expected benefits to financial stability outweigh the costs of the designation.”
That is an important step considering the costs can be astronomical in many cases. Looking at just the cost to investors, AAF found that as a result of FSOC designating a company, investors in that company could see their returns reduced by as much as 25 percent over the long term. More broadly, it is simply good policy to have an economic justification for additional regulation which requires at least some consideration of probabilities and analysis and evidence that goes beyond speculation.
This is something the administration must keep in mind as FSOC members are nominated and confirmed, and as this administration continues to develop its policy objectives.
Meghan Milloy is Director of Financial Services Policy for the American Action Forum.
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