An insurance analyst says recent action by the Federal Reserve Board regarding MetLife and its bank implies the Fed may be rethinking the use of bank metrics in regulating insurance companies.
“I don't believe the Fed intends to force insurance companies designated as systemically significant (SIFI) into the bank stress test model and metrics without at least some adjustments to reflect some of the key differences in their business models (duration of liabilities, lower liquidity risk, etc.),” concluded John Nadel of Sterne Agee & Leach, Inc., New York.
He made his comments through an investor’s note prompted by the MetLife securities filing indicating that the Fed has granted its request for an extension through Jan. 5, 2013 of its need to refile data related to the 2012 stress test that MetLife underwent.
“We believe the granting of an extension through Jan. 5 is specifically designed to ensure that MetLife will not have to submit to another stress test as a bank holding company,” Nadel said.
“And we believe this is good news not just for MetLife, but for all potential systemically significant insurance companies,” Nadel said.
The extension “is a clear indication that the Fed has little, if any, interest in regulating MetLife as a bank,” Nadel said.
And, on Friday, the Financial Stability Oversight Council (FSOC) disclosed that it had asked several non-banks to file financial data needed to determine whether they should be designated as a non-bank SIFI.
Another analyst said Friday that he believed that AIG, MetLife and Prudential are amongst the non-banks the FSOC is evaluating as potential SIFIs.
AIG today confirmed that it has been asked to provide the so-called Stage 3 or final step, data that the Dodd-Frank Act requires the FSOC to use in determining whether a non-bank should be designated as a SIFI.
In regard to a SIFI designation, Nadel said Sterne Agee analysts believe “it's likely” that insurance company SIFIs will be designated before the end of 2012 (although formally MetLife cannot be designated a non-bank SIFI until it officially sheds its bank holding company status), and as such are likely to be part of a stress testing process in early 2013 similar to the time line currently applied to bank SIFIs.
“In and of itself, this is not a significant concern; it's far more important that the Fed make certain adjustments to the bank stress testing model to be more applicable/appropriate for an insurance company,” Nadel said.
“Our sense is the probability of a more positive outcome for insurance companies is improving,” Nadel said.
He said Sterne Agee analysts believe that the Fed and other officials recognize that the stress test, as currently designed for banks, “is flawed when applied to non-bank institutions.”
“If we're right in our assessment that the Fed is acting to avoid testing MetLife as a bank, then it stands to reason the Fed is unlikely to want to stress test other potential insurance company SIFIs as banks,” Nadel said.
“This could be a positive development in that it suggests, in our view, that the Fed is open to potential adjustments to the bank-designed exam to better reflect some of the key structural differences between a bank and a large life/annuity insurance company,” Nadel said.
The issue arose because as a result of the stress test, the Fed declined to allow MetLife to raise its dividend or buy back its stock. MetLife was required to take the test because it is classified as a bank holding company.
MetLife, seeking to escape Fed regulation as a SIFI, sold its bank to GE Capital last December. But, the sale is pending because MetLife has been unable to win approval of the Federal Deposit Insurance Corporation for sale of the bank.
Now, MetLife has restricted the deal and has applied to the Office of the Comptroller of the Currency (OCC) to sell the bank.
In the note, Nadel said that Sterne Agee analysts believe the Jan. 5 date should provide sufficient time for the OCC to review and approve the pending sale of MetLife’s depository institution to a subsidiary of GE Capital.
“Moreover, we believe it's increasingly likely that MetLife will not have to submit to another stress test (either resubmission of 2012 or submission for 2013) as a bank holding company, so long as the deal gains approval at some point before the Jan. 5 extension,” Nadel said.