Top U.S. regulators rightly tagged MetLife Inc. as “too big to fail,” a lawyer for the government told a federal appeals court, urging it to reverse a ruling that set back efforts to rein in risk in the American financial system.

The Financial Stability Oversight Council took the correct approach when it designated MetLife as a systemically important financial institution in December 2014, Mark Stern, an attorney for the government, said during a hearing Monday. He disputed assertions that the FSOC was required to consider the likelihood a crisis could upend the biggest U.S. life insurance company and not merely what would happen if it did.

“Once a crisis develops, how it’s going to proceed is very difficult to predict,” Stern said.

Had it stood, the council’s determination would have subjected MetLife to enhanced capital and liquidity requirements and compelled the insurer to prepare plans for its orderly dissolution in the event of a crisis. In March, U.S. District Judge Rosemary Collyer rescinded the designation, calling the government’s analysis “fatally flawed.”

The council, Collyer said, failed to follow its own guidelines and reversed itself on whether a company’s vulnerability to market distress would be considered and what it means to threaten the financial stability of the U.S.

FSOC’s Creation

FSOC was created under the 2010 Dodd-Frank reform legislation, with the intent of more closely regulating the financial industry in the wake of the global economic crisis of 2008. Among its 10 voting members are Treasury Secretary Jacob J. Lew, Federal Reserve Chair Janet Yellen and Consumer Financial Protection Bureau Director Richard Cordray.

The three-judge appellate panel in Washington, which included two appointees of President Barack Obama and one nominee of former President George H.W. Bush, heard about an hour of argument from both sides in the case.

MetLife’s lawyer, Eugene Scalia, defended Collyer’s decision.

“They just plunge MetLife to whatever depths are necessary, without any serious examination of how it got there,” Scalia said, noting that MetLife Chief Executive Officer Steven Kandarian once told the council the designation was “the biggest threat to this company in its history.”

In court papers, lawyers for the government countered that Collyer didn’t find the council’s collective judgment was mistaken even though she’d set that judgment aside.

Regulatory Tag

Just three other non-banks have borne the systemically-important financial institution label, Prudential Financial Inc., American International Group Inc., and General Electric Co., which sold off almost $200 billion of lending assets as part of a successful effort to shed the FSOC tag.

MetLife has also moved to reduce its regulatory profile. In January, the company said it planned to spin off a U.S. retail business to boost cash flow and alleviate regulatory concerns.

About 80 percent of shares in the new business, called Brighthouse Financial Inc., will be distributed to MetLife investors, the company said in papers filed Oct. 5 with the U.S. Securities and Exchange Commission. The separation would reduce its assets by about 25 percent, or $240 billion, leaving MetLife smaller than Prudential but bigger than AIG.

Monday’s arguments were heard by U.S. Circuit judges A. Raymond Randolph, a 1990 Bush nominee, and Sri Srinivasan and Patricia Millett, both 2013 Obama nominees. Dodd-Frank’s authors, former Massachusetts congressman Barney Frank, and former U.S. Senator Christopher Dodd of Connecticut, both Democrats, submitted court papers in support of the government.

The case is MetLife Inc. v. Financial Stability Oversight Council, 16-5086, U.S. Court of Appeals, District of Columbia Circuit (Washington). The lower court case is MetLife Inc. v. Financial Stability Oversight Council, 15-cv-00045, U.S. District Court, District of Columbia (Washington).

This article was provided by Bloomberg News.