By Geoffrey P. Miller
Judge Collyer’s order rejecting MetLife’s designation as a systemically important financial institution (SIFI) is a potential watershed moment for regulation in the aftermath of the crisis of 2007-2009 (MetLife, Inc. v. Financial Stability Oversight Council (PDF: 27.3 KB), No 15-cv-0045 (D.D.C., March 30, 2016)).
Responding to legitimate concerns about the performance of financial regulators and central bankers who failed to understand the dangers posed by the credit bubble and the subprime mortgage boom, Congress in the Dodd Frank Act created the Financial Stability Oversight Council (FSOC) and charged it with responsibility for overseeing the stability of financial markets.
The FSOC’s most important substantive power is its authority to designate non-bank financial institutions as SIFIs and thereby subject them to supervision by the Fed under heightened prudential standards.
There is much to be said for the SIFI idea. The financial crisis demonstrated that shadow banks can pose systematic risks and warrant enhanced regulatory scrutiny.
But FSOC’s implementation of this idea has been problematic. Critics charge that FSOC’s standards for SIFI designation are vague and inconsistently applied and that its decisions are politicized and cloaked in secrecy. Continue reading →