Financial Regulators Should End ‘Too-Big-to-Fail’ Status
To drain the swamp, as President Trump promised to do, it is first necessary to contain the swamp. That’s why at the meeting tomorrow of the Financial Stability Oversight Council (FSOC), the new financial regulators should stop the flood of “too-big-to-fail” designations that rained down so freely during the Obama administration.
Created by the Dodd-Frank “financial reform” law in 2010, the FSOC is a council of financial regulators from various agencies that has the power to designate a financial firm as a “systemically important financial institution” (SIFI). With the SIFI designation, FSOC is both bestowing on a firm a potential benefit, by telling the capital markets that the government will not let this firm fail, and a potential harm by saddling it with an extra layer of regulation.
Some firms, such as American International Group, already the recipient of one massive government bailout, have embraced the SIFI designation. But others, to their credit, have told the government they don’t want the red tape that comes with being labeled “systemically important,” even if they would benefit from perception of SIFIs as “too-big-to-fail.”
Most notably, insurance giant MetLife sued the FSOC when it designated the firm as a SIFI, and last year Judge Rosemary Collyer ruled in the firm’s favor. The Obama administration decided to appeal. The FSOC should now drop that appeal, or at the very least ask the courts to refrain from issuing a decision until the entire SIFI designation process is reviewed per orders of the Trump administration.
The executive memorandum President Trump issued in April called for a “temporary pause of determinations and designations.” So trying to second-guess a court ruling that called the SIFI process flawed should be paused as well.
Indeed, there is evidence that designating non-bank firms as SIFIs, if it subjects them to bank-like capital standards that some regulators say it might, would itself result in financial instability. Bank-like capital rules may be totally inappropriate for non-banks firms, like life insurance companies. Banks have deposits that can be withdrawn at any time, whereas life insurance firms have policies that in most cases won’t pay out for years. As Adam Smith Institute senior fellow Tim Worstall writes in Forbes, MetLife “is not inherently fragile: because it’s not a bank and isn’t borrowing short to lend long.”
As I have written in National Review, imposing bank-capital standards on insurers would raise costs for life-insurance consumers by $5 billion to $8 billion, according to the economic consulting firm Oliver Wyman. These costs could hit policyholders through both higher premiums and reduced benefits. And some policies simply could become unavailable as insurers “exit certain product lines,” the Oliver Wyman study found.
In the name of financial stability, FSOC should at the very least hit the much-need pause button on the SIFI designation process.