The Dodd-Frank Act creates the Financial Stability Oversight Council (FSOC). One of the primary responsibilities of the FSOC is to designate non-banks as “systemically important” and hence requiring of additional oversight by the Federal Reserve. Setting aside the Fed’s at best mixed record on prudential regulation, the intention is that additional scrutiny will minimize any adverse impacts on the economy from the failure of a large non-bank. The requirements and procedures of FSOC have been relatively vague. We have, however, gained some insight into the process since MetLife has chosen to contest FSOC’s designation of MetLife as systemically important.
One of the benefits of MetLife’s resistance has been to shed additional light on some of the rationales used by FSOC. While FSOC pretty much throws everything in the kitchen sink at MetLife, one of the more interesting (and bizarre) claims is that MetLife is a risk to financial stability because of the potential behavior of state insurance regulators. After raising the specter of a run by policy-holders (yes, the old bank-run spin), FSOC then worries that state insurance regulators might actually use their authorities to “impose stays on policyholder withdrawals and surrenders.” You’d think this would be a good thing, but no FSOC worries that “Surrenders and policy loan rates could increase if MetLife’s policyholders feared that stays were likely to be imposed either by MetLife’s insurance company subsidiaries or by their state insurance regulators.” So yes, FSOC is serious here. The ability of state regulators to stop “runs” could be the very cause of those runs, and hence MetLife must be regulated by the Federal Reserve.
Such an argument would be bad enough on its face, but it also ignores that the “orderly liquidation authority” of Dodd-Frank allows the FDIC, when resolving a non-bank, to also impose stays. The FDIC can also void payments made up to 90 days before the beginning of a receivership. So under FSOC’s logic, the fact that (federal or state) governments can reduce the confidence of counter-parties in a company is grounds for additional regulation of said company. This kind of spin basically allows FSOC, and by extension the Fed, to pretty much regulate anyone they want, if the government is the very source of the potential instability.