MetLife Inc.’s holdings of hard-to-sell securities and reliance on derivatives are among the reasons that the largest U.S. insurer qualifies for Federal Reserve supervision, a government panel said.
“A large-scale forced liquidation of MetLife’s large portfolio of relatively illiquid assets, including corporate debt and asset-backed securities” could disrupt trading or funding markets, according to the decision released today by the U.S. Financial Stability Oversight Council.
The announcement offers more details as to why council members voted 9-to-1 to designate MetLife as a systemically important financial institution. The company, which held $909 billion in assets as of Sept. 30, announced the decision yesterday. New York-based MetLife has the right to appeal to federal court and said it was weighing its options.
The designation can subject companies to tougher capital, leverage and liquidity requirements. While the largest lenders are automatically SIFIs, the council identifies non-bank financial firms whose collapse could threaten the financial system. The near failure in 2008 of American International Group Inc., which required a $182.3 billion bailout, highlighted the risks of insurers, which are mostly overseen by state watchdogs.
MetLife avoided a bailout in the financial crisis and has expanded to become the fifth-largest company in the Standard & Poor’s 500 Index by assets.
FSOC cited the company’s commitments to individual clients and institutions, through products such as annuities and guaranteed investment contracts. The panel considered the risk of a market slump that drains value from securities backing the insurer’s obligations.
Complexity, Interconnectedness
MetLife’s “activities expose other market participants to MetLife and create on– and off–balance sheet liabilities that increase the potential for asset liquidations by MetLife,” according to the FSOC report. “Efforts to hedge such risks through derivatives and other financial activities are imperfect and further increase MetLife’s complexity and interconnectedness with other financial markets participants.”
The FSOC, which has 10 voting members and is led by Treasury Secretary Jacob J. Lew, also includes the heads of the Fed, the Securities and Exchange Commission and the Federal Deposit Insurance Corp. A two-thirds vote, including Lew’s, is required to deem a non-bank financial company systemically important.
Three others have been designated: AIG, life insurer Prudential Financial Inc. and General Electric Co.’s finance arm.