Insurance giant MetLife won a big victory Wednesday as a district court rescinded the government’s designation of the firm as “systemically important.” Though not immediately apparent, this was also a victory for Fintech firms as well, from big online “marketplace lenders” to small startups to firms not yet formed.
It’s a great win, in fact, for all innovators wishing to create an alternative to the established banking order. The ruling limits the government using its power arbitrarily to fit non-bank financial firms into the banking regulation hole.
Despite MetLife’s protests that it was not systemically important – and its wishes to have neither the regulatory burdens that come with such designation nor the benefits of being designated by the government as essentially “too big to fail” – the Financial Stability Oversight Council still labeled the firm that way with very little empirical data. Though Judge Rosemary Collyer’s ruling is still under seal, based on her public order, she seems to have rejected the FSOC’s paltry justification for such action.
Proponents of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010 claim it ended bailouts. But the law’s creation of FSOC shows the opposite is true. FSOC, a secretive council of regulators from the Treasury Department and various banking and financial agencies, has the power to designate both banks and non-banks as “systemically important financial institutions” (SIFIs).
Being designated a SIFI means the firm is largely seen as too-big-to-fail by policymakers and will be at least temporarily propped up to forestall a normal bankruptcy. This aspect likely confers a benefit on firms with this designation. It’s no wonder that many firms, including bailout recipient American International Group, have not only not fought this designation, but embraced it.
But the designation usually also comes with bank-like capital rules that may be totally inappropriate for non-banks firms, like MetLife. Banks have deposits that can be withdrawn at any time, whereas life insurance firms have policies that in most cases won’t pay out for years.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 my fellow FORBES contributor and Adam Smith Institute senior fellow Tim Worstall writes today, MetLife “is not inherently fragile: because it’s not a bank and isn’t borrowing short to lend long.”
MetLife decided the burdens outweighed the benefits of being a SIFI, and it prevailed. In its legal brief, MetLife’s argument paralleled some of those of a lawsuit from my organization, the Competitive Enterprise Institute, about how FSOC violates the Constitution’s separation of powers through its unusual structure that evades both congressional and judicial constraints. (The FSOC challenge is no longer part of that case, though the lawsuit is continuing against the Consumer Financial Protection Bureau. Click here for more info on that case).
Again since the case is under seal, it’s unclear what Collyer’s reasoning was in stopping FSOC from designating MetLife a SIFI. It’s also unknown whether MetLife will prevail if the government appeals. But Collyer’s decision at least puts a break on FSOC and other regulatory agencies having unfettered power to decide which firms are “systemically important.”
And this is why Fintech entrepreneurs should cheer. As innovators, they are creating models different – and in many cases more sustainable – than banks, but regulators in a bank-like mindset still show inclinations to shut down first and ask questions later. But knowing that they could still be checked by the judicial system should be a good incentive for these regulators to at least sit down and discuss issues with the FinTech players.
Originally posted to Forbes.