2014 12 - re: FSOC SIFI Designation of MetLife, Woodall / Hamm - Views of the Council’s Independent Member Having Insurance Expertise - 13p

  • 2014 12 - re: FSOC SIFI Designation of MetLife, Woodall / Hamm - Views of the Council’s Independent Member Having Insurance Expertise - 13p
  • Roy Woodall - 
  • I do share concerns about some of MetLife’s activities, particularly in the non-insurance and capital markets activities spheres, and in the resulting exposures identified and described in the Council’s Notice of Final Determination in the Company Overview and Exposure Transmission Channel sections.
    • These activities might conceivably pose a threat to the U.S. financial stability under certain circumstances.
    • It is these types of activities that should be fully evaluated under the Second Determination Standard, as opposed to the flawed Council analysis under the First Determination Standard.
  • I do not, however, agree with the analysis under the Asset Liquidation Transmission Channel of the Notice of Final Determination, which is one of the principal bases for the finding under the First Determination Standard.
    • I do not believe that the analysis’ conclusions are supported by substantial evidence in the record, or by logical inferences from the record.
      • The analysis relies on implausible, contrived scenarios as well as failures to appreciate fundamental aspects of insurance and annuity products, and, importantly, State insurance regulation and the framework of the McCarran-Ferguson Act.2
    • The analysis discusses in detail, and is dismissive of, the U.S. State insurance regulatory framework, the panoply of State regulatory authorities, and the willingness of State regulators to act, thereby overstating shortcomings and uncertainties that are inherent in all regulatory frameworks, State or Federal.
  • The Council’s expressed concerns in the Notice of Final Determination as to existing regulatory scrutiny, the State guaranty associations, and the potential complexities associated with the resolution of a large insurance company, seem to me to be unbalanced and lead to distorted conclusions regarding the Asset Liquidation Transmission Channel.
  • In my considered view, the Council should be more transparent about which of MetLife’s activities, together or separately, pose the greatest risk to U.S. financial stability in order to provide constructive guidance for the primary financial regulatory authorities, the Board of Governors, international supervisors, other insurance market participants and, of course, MetLife itself, to address any such threats posed by the company.
  • It is important to identify particular activities in order to encourage appropriate and further action that could lessen any company-specific threat to U.S. financial stability.
    • Paraphrasing what one insurance thought leader once told me: “We should not tolerate any insurance company posing a threat to our financial system – pinpoint what makes them systemically risky and let’s fix them.”3 < 3Therese M. Vaughan, Ph.D., Dean of the College of Business and Public Administration, Drake University, and former Iowa Insurance Commissioner, President and CEO of the National Association of Insurance Commissioners, International Association of Insurance Supervisors Executive Committee member, and Chair of the Joint Forum.>
  • I believe that not pinpointing specific activities that contribute to the company’s systemic risk profile is a mistake.
    • Importantly, rather than confronting the greater burden tied to the Second Determination Standard, it is easier to simply presume a massive and total insolvency first, and then speculate about the resulting effects on activities, than it is to initially analyze and consider those activities.
  • However, the Notice of Final Determination concludes that the origin of the company’s systemic risk would stem from a sudden and unforeseen insolvency of unprecedented scale, of unexplained causation, and without effective regulatory responses or safeguards.
  • I simply cannot agree with such a premise, which is the central foundation for this designation.
  • On February 14, 2013, MetLife announced that it had deregistered as a bank holding company, as approved by the Board of Governors and the Federal Deposit Insurance Corporation (FDIC), after having been supervised by the Board since 2001.5
    • Many of the company’s activities set forth in the Notice of Final Determination developed over this time period.
  • FSB
  • As the Council continues its work, it is my hope that we can concentrate our efforts to consider regulatory reform and improve regulation of those large nonbank financial companies and their activities that have been left largely unexamined since the financial crisis, but that may significantly risk financial instability.
    • The Council’s vigor in evaluating such unexamined (and in some cases unregulated) nonbank financial companies is imperative in successfully fulfilling its charge to identify threats to our financial system, economy, and the American people.
  • Adam Hamm - 
  • To the extent that the Council speculates about such stays leading to further contagion across the insurance industry, insurance regulators have extensive authorities to intervene to protect policyholders at these other firms as well.
  • Moreover, the Basis implicitly assumes material financial distress at all insurance entities at the same time, yet the Basis cites no historical examples of that having ever occurred. <FTC Report, BTID, etc>
  • As for the exposure channel, the Council makes claims that retail policyholders or corporate  customers would suffer losses as a result of material financial distress at MetLife, but does not detail how those losses translate into “an impairment of financial intermediation or of financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy.” <Pacific Lumber>
  • A key consideration for the final designation is the asset liquidation channel.
    • The final Basis, like the proposed Basis, continues to offer merely speculative outcomes related to the liquidation of assets based in large part on hypothetical and highly implausible claims of significant policyholder surrenders. 
    • To remedy this, the Council offers additional analysis in an appendix, but that analysis treats all financial institutions exactly the same using broad-based assumptions regarding asset dispositions that do not take into account the specific characteristics of MetLife, its assets and liabilities, the particular characteristics of insurance products or insurance policyholder behavior.
    • There is no explicit provision for the differences in timing and the assets of MetLife are categorized using bank asset categories even though they are substantially different. 
  • For example, in response to the arguments by MetLife seeking to analogize the impacts of a failure of MetLife to other insurance company failures in history, the Council notes correctly that the failure of an insurance company of MetLife’s size and scope has never taken place.
    • While that is a fair statement as each company has its own unique characteristics, the fact that there is no comparable insurance failure is a testament to the state insurance regulatory system, a fact that the Council ignores.
  • I also take issue with certain arguments that are not firm-specific.
    • For example, the Council raises concerns that a MetLife failure could stress the guaranty fund system.
  • Another example is the Basis’ treatment of MetLife’s Funding Agreement Backed Securities Programs and their impact on money market funds in the event MetLife would be unable to meet its obligations under those contracts.
  • Finally, I would be remiss if I did not mention that, despite the sheer volume of arguments (no matter how far-fetched) contained in the Basis, the Council fails to identify the specific set of legitimate issues of concern that has led to the company’s designation.