Source: https://regulation-y.com/2017/04/29/when-macroprudential-policy-meets-the-judge-prospective-implications-of-the-metlife-case-for-the-fsoc-and-the-asset-management-industry/
Timestamp: 2019-04-25 14:40:22+00:00

Document:
The aftermath of the financial crisis has led U.S. regulators to reconstruct the boundaries of the financial system by undertaking a number of regulatory reforms focusing, in particular, on procyclical behaviors of the largest, most interconnected credit institutions. A wide variety of changes in the prudential settings of banking structures, such as capital and liquidity requirements, have set the stage for the establishment of a macroprudential layer of banking regulation  . As part of these regulatory efforts this new supervisory architecture has been accompanied by macro stress testing for bank holding companies, with the aim of capturing the adequacy of US banks’ capital planning and loss absorbing capacity during periods of severe shocks . Although these reforms have been instrumental in enhancing the resilience of largest banking entities , most of the US multifaceted financial institutions have remained out of the macroprudential policy scope. In fact, although US regulators have taken some steps to ensure greater stability in some areas of financial markets, as for example in securitization and data reporting requirements for non-banks, these institutions are not generally screened under the domain of macroprudential authority. However, the institutional settings of the Financial Stability Oversight Council (FSOC), established by the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (hereafter: Dodd-Frank Act) , have acknowledged the systemic implications that nonbanks may have for the stability of the financial system, providing a safety valve against the limited scope of macroprudential supervision.
Section 113 of the Dodd-Frank Act authorizes the FSOC to determine that a non-bank financial company’s material financial distress could pose a threat to U.S. financial stability in view of a number of quantitative and qualitative criteria. Once recognized as Systemically Important Financial Institutions (SIFIs), these companies are required to comply with enhanced prudential standards and are subject to consolidated supervision by the Federal Reserve directly. In order to promote its financial stability objective, the FSOC has been quite active in using this power. On July 8, 2013, American International Group, Inc. and General Electric Capital Corporation, Inc. were designated as nonbanks SIFIs. On September 19, 2013, the same determination was made for Prudential Financial, Inc. On December 18, 2014, the Council considered as SIFI also MetLife, Inc. Most importantly, MetLife decided to challenge such a designation before the United States District Court for the District of Columbia, asking for a judicial review of the legitimacy of such a SIFI designation.
The academic literature has been quite active in appreciating costs and benefits of FSOC’s SIFI designations. For example, Wan (2016)  examines the effectiveness of the FSOC legal framework and its designation powers, questioning the application of banking tools to address systemic risks in the asset management industry. Schwarcz & Zaring (2017)  defend the FSOC’s methodology in designating SIFIs, arguing that it represents a “regulation by threat” approach to systemic risk, where the effectiveness of the authority’s powers rely on the threat to impose greater prudential requirements and supervision on nonbanks if they fail to address systemic risk on their own. Conversely, Wimberly (2014)  noted that the FSOC failed to recognize the relevant business differences between banks and nonbanks and, on this basis, SIFI designations are generally unjustified. Skinner (2016)  criticizes the SIFI designation framework by arguing that it neglects its social and economic costs, which, in turn, may generate negative spillover effects on nonbanks and on the financial stability as a whole. Similarly, Gallagher (2016)  suggests the FSOC’s designation procedure is murky and this opacity is due to faulty regulations having no checks and balances. Against this backdrop, Whalen (2016)  suggests the establishment of the FSOC did not make the financial system any safer, while SIFI designations have just forced some nonbanks, including Metlife, to leave important retail markets. As a result, the author argues for the need to remove the FSOC as a policy priority. White (2016)  focuses instead on how SIFI designations have exceeded the limits of administrative law, blaming, however, the Congress for failure to make appropriate policy decisions in shaping the FSOC’s legal framework. In line with this, Wallison (2016)  argues that the FSOC is simply implemententing the SIFI designations made by the Financial Stability Board (FSB), while all the powers assigned to the FSOC are unnecessary to make the financial system safer. Finally, Norchi (2017)  criticizes the FSOC’s SIFI designation methodology which falls short of providing sufficient guidance on how to assess systemic vulnerabilities and make proper cost-benefit analyses of SIFI decisions.
The aim of this post is to make one step further in this analysis by looking at the macroprudential implications that the Metlife judicial case may have for the asset management industry. The Court’s ruling in favor of MetLife arguments have substantially weakened the credibility of the FSOC and threatened its independent decision-making process. The content of the Court’s judgements is likely to negatively affect the FSOC’s capacity to carry on its macroprudential mandate, while risks of new designation challenges by other nonbanks are now material. Against this backdrop, I argue that the judiciary may be seen now as the new ‘ultimate decision-maker’ in macroprudential policy, having now the capability to question methodologies and procedures concerning the FSOC’s policy responsabilities. In addition, the Court’s judgement may pave the way for a reconsideration of the FSOC’s role within the whole US supervisory architecture. The US Congress may in fact use this decision as a justification for implementing the GOP financial policy agenda, envisioned in the ‘Financial Choice Act’, which severely tightens the role of the FSOC, and more broadly, the function of prudential regulation dealing with systemic risks. As a result, asset managers could use in the future the ‘micro-economic’ logic of the court to shield the whole industry from future FSOC’s supervisory actions, whereas the ultimate costs for financial stability can be substantial.
This Article is organized as follows. Section 2 delimits the FSOC’s statutory framework and the designation methodology for SIFIs, including the implementation of this policy framework to MetLife. Section 3 discusses the METLIFE v. FSOC case and it main features, including the FSOC’s alleged violations of substantial administrative law, the scope of the Chevron Doctrine, and the cost-benefit analysis provided by the Court on SIFI decisions. Section 4 discusses the negative externalities that the Court’s judgement may have for the ongoing work of the FSOC, along with the new role now assumed by the judiciary in macroprudential policy and concludes by delving into the impact of this judgement to the Republican agenda on financial reforms and the critical incentives provided to the asset management industry.
The assessment of nonbanks as SIFIs is based upon a set of uniform provisions which aim at streamlining the determination process for nonbanks financial companies followed by the FSOC and, thus, foster procedural transparency . In its final rule and interpretative guidance, titled ‘Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies’ , the FSOC has defined key terms and concepts, a six-category framework related to this SIFI determination including quantitative metrics, and the administrative procedure utilized by the FSOC to assess whether a nonbank financial company shall be subject to the enhanced supervision of the Fed and higher prudential standards.
Section 113 of the Dodd-Frank Act provides that the FSOC’s determination shall be based on two alternative criteria, namely (I) material financial distress at the nonbank financial company that could pose a threat to the financial stability of the United States (so called ‘First Determination Standard’), or (II) the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial companies could pose a threat to the financial stability of the United States (so-called ‘Second Determination Standard’). In pursuing such determination, the FSOC is required to consider a number of statutory elements which may help assess the systemic materiality of nonbank financial companies.
These elements are: (i) the extent of the leverage of the company; (ii) the extent and nature of the off balance-sheet exposures; (iii) the extent and nature of the transactions and relationships of the company with other significant nonbank financial companies and significant bank holding companies; (iv) the importance of the company as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the U.S. financial system; (v) the importance of the company as a source of credit for low-income, minority, or under-served communities, and the impact that the failure of such company would have on the availability of credit in such communities; (vi) the extent to which assets are managed rather than owned by the company, and the extent to which ownership of assets under management is diffuse; (vii) the nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company; (viii) the degree to which the company is already regulated by one or more primary financial regulatory agencies; (ix) the amount and nature of the financial assets of the company; (x) the amount and types of the liabilities of the company, including the degree of reliance on short-term funding; and (xi) any other risk-related factors that the Council deems appropriate .
To further specify the content of the SIFI determination, the interpretive guidance specifies how these elements are to be used by the FSOC to pursue the First and Second Determination Standards. This guidance explains a set of key definitions, such as ‘material financial distress’ and ‘threat to the financial stability of the United States’, which are relevant to both determination standards.
In addition, the guidance describes three shock channels which are intended to facilitate the transmission of the negative spillover effects of a nonbank financial company’s distress to other components of the markets and the economy as whole. These transmission channels are defined as: (i) exposure of creditors, counter-parties, investors, or other market participants to a nonbank financial company; (ii) disruptions caused by the liquidation of a nonbank financial company’s assets; and (iii) the inability or unwillingness of a nonbank financial company to provide a critical function or service relied upon by market participants and for which there are no ready substitutes .
The interpretive guidance provides a detailed description of a three-stage process adopted by the FSOC for its SIFI determinations in non-emergency situations. Each stage of the Determination Process is featured by an analytical assessment of a number of information obtained in order to determine whether a nonbank financial company meets the quantitative criteria set out in the First or Second Determination Standard. In the first stage, the FSOC makes an assessment of the nonbank financial companies based upon uniform quantitative thresholds that are broadly applicable across the financial sector to a large group of nonbank financial companies . These thresholds are tied to framework categories of size, interconnectedness, leverage, liquidity risk and maturity mismatch. In accordance with the guidance, a nonbank financial company would be subject to additional review if it meets both the size threshold and any one of the other quantitative thresholds. It is important to note that this assessment does not automatically entail that a nonbank financial company is to be considered a SIFI. Instead, in this stage the FSOC’s aim is to identify those nonbank financial companies that require further evaluation in subsequent stages of review . For these companies the FSOC will conduct in the second stage a comprehensive analysis of their systemic potential, using the six category framework described above .
This analysis is based on a broad range of quantitative and qualitative information available through existing public and regulatory sources, including industry and company-specific metrics beyond those analyzed in the first stage, and any information voluntarily submitted by the company. Based on this analysis, the FSOC will identify the nonbank financial companies requiring further review in the third stage. In more detail, if this assessment is positive, the FSOC transmits a notice of consideration to each nonbank financial company that deserves further review in the third stage. Nonbank financial companies have an opportunity to react by submitting materials within a specific period of time determined by the Council . Based on the quantitative and qualitative information analyzed during the second stage, and using quantitative and qualitative information collected directly from the nonbank financial company, generally by the Office of Financial Research, the FSOC will determine whether to designate a nonbank financial company as a SIFI and, as a result, bring it under the scope of the Board of Governors prudential supervision .
The FSOC’s designation of MetLife as a nonbank SIFI was based on the First Determination Standard only, as the Council concluded that the financial structure of MetLife was likely to pose a threat to the financial stability of the United States . As a result, the FSOC believed the examination of the nature, scope, size, scale, concentration, interconnectedness, or the mix of MetLife’s activities was not necessary in this case, as the MetLife’s material financial distress could inflict in any case significant damage on the broader economy through the exposure and asset liquidation transmission channels .
Firstly, this determination is supported by the FSOC’s analysis of the MetLife’s funding structure. A significant portion of the MetLife’s funding activities in fact relies on funding agreements and related products, such as funding agreement–backed notes and commercial papers, which substantially magnify the company’s operating leverage and are likely to exacerbate the transmission of material financial distress through the exposure and asset liquidation transmission channels .The FSOC recognizes the liquidity risks underlying this funding structure, as MetLife may not be able to roll over or extend its funding agreement–backed securities in periods of severe stress. This, in turn, would force MetLife to fire sale assets, including illiquid assets, if the organization’s liquid assets were insufficient to meet this unexpected demand. In addition, MetLife’s securities lending program and the reinvestment of MetLife’s cash collateral could exacerbate these risks for other financial firms, leading to an impairment of financial intermediation that could severely disrupt the economy as a whole .
Against this backdrop, direct and indirect exposures of MetLife’s creditors, counter-parties, investors, policyholders, and other market participants to MetLife are large enough to endanger those entities via the exposure transmission channel, would MetLife experience material financial distress . This, in turn, could generate a contagion that may threat the stability of the US financial system as a whole. At the same time, if MetLife encountered significant financial distress triggering a fire sale of assets, it would be obliged to liquidate assets at discount prices in order to meet its obligations to creditors, policyholders and other counter-parties . Considering its funding structure, MetLife would be forced to fire sell assets in response to investors’ refusal to rollover some of its approximately $35 billion of FABCP and FABNs outstanding or following early returns of securities borrowed in connection with its approximately $30 billion securities lending program . Moreover, a significant liquidation of MetLife’s assets could cause significant disruptions to key markets, including corporate debt and ABS markets, given its substantial holdings of relatively illiquid assets . The large size of these portfolios could make it difficult to liquidate the associated assets, if needed, and put further pressure on market prices, causing significant losses for other firms with similar holdings .
In line with all these findings, the FSOC concluded that MetLife qualifies for SIFI designation. The regulatory framework then applicable to MetLife was not sufficient to handle the potential negative effects of its systemic components. By applying a number of new requirements to MetLife, including a resolution plan for its rapid and orderly resolution, enhanced prudential standards and rules providing for the early remediation of financial distress, the FSOC believed MetLife would internalize part of the systemic costs it could generate for the US economy as a whole.
Dissatisfied by the costs that such a SIFI determination would have entailed for its business model, on January 13, 2015, MetLife filed a complaint in the United States District Court for the District of Columbia challenging the underlying rationale of the FSOC’s designation . For MetLife, one of the most relevant criticisms in the FSOC’s determination was its ‘arbitrary and capricious’ nature while a number of critical errors were to be found in the methodological development of its analysis . In the eyes of the firm, the FSOC not only failed to appropriately understand the financial structure of MetLife, but also it relied on vague claims which made such a determination speculative and rather opaque. The lack of transparency in the FSOC’s determination would then violate MetLife’s due process rights . In response to these arguments, on March 30, 2016, the U.S. District Court ruled in favor of MetLife and repealed the FSOC’s designation of the company as a SIFI . The Court argued the FSOC’s determination on the basis of two motives: (i) the FSOC made critical departures from two of the standards adopted in its Guidance, never explaining such departures or even recognizing them as such, thereby rendering its determination process fatally flawed; (ii) the FSOC assumed the upside benefits of designation without providing any consideration of the downside cost to MetLife .
In its reasoning the Court firstly acknowledges the scope of its review. In line with Dodd Frank Act Section 113(h), this is in fact limited to whether the final determination made by the FSOC as administrative agency was ‘arbitrary and capricious’ . In doing so the Court restrained its judicial assessment in considering only whether the FSOC made a clear error of judgment in its decision-making process. The arbitrary and capricious standard is therefore inherently narrow as the Courts are not generally permitted to overrule policies issued by autonomous administrative agencies. While the District Court established as a preliminary matter that MetLife was eligible for SIFI designation , it nonetheless supported MetLife’s claims regarding the FSOC’s violation of its own guidance in failing to assess MetLife’s vulnerability to material financial distress before addressing the potential effect of such distress.
The Court noted a defective application of the FSOC’s final rule with respect to the six elements considered when assessing the potential threat of a company’s material financial distress to U.S. financial stability. In its reasoning the Court highlighted how the first three elements – namely, size, substitutability, and interconnectedness – were meant to assess the potential impact of the nonbank financial company’s financial distress on the broader economy, while the others – leverage, liquidity risk and maturity mismatch – were intended to assess the vulnerability of a nonbank financial company to financial distress. Since all the six elements have been used by the FSOC to assess only the potential effects of a company’s material financial distress, without any vulnerability assessment of MetLife, the court acknowledged an ‘undeniably inconsistent’ application of the analytical framework set forth for SIFI determination . The FSOC’s insistence on its coherent interpretation of the assessment standard and the absence of any good reasons to change policy in its determination process were additional evidences of FSOC’s flawed decision-making. By the same token, the District Court found the FSOC failed to establish a rational basis for a finding that MetLife’s material financial distress would ‘materially impair’ MetLife’s counter-parties and threat the U.S. financial stability. In its analysis of the exposure channel, the FSOC limited its arguments to technical assumptions on potential market exposures, without any considerations for collateral or other mitigating factors .
As a result, the Court highlighted how the FSOC failed to provide any reasoned projections on what could actually happen if MetLife were to suffer material financial distress, and what market counter-parties would have to do in order to manage the associated spillover effects. As the FSOC refused to undertake this analysis, the Court could not affirm that finding. In the words of the Court, the application of the First Determination Standard would require a causal connection between the company’s material financial distress and the resultant ‘impairment of financial intermediation or of financial market functioning’ which, in turn, should be severe enough to inflict significant damage to the U.S. economy. The FSOC simply assumed this casual connection, without any explanation on how it would result from MetLife’s systemic stress . The absence of any such explanation made the FSOC’s determination contrary to its guidance, and a result of this, arbitrary and capricious.
In addition, the Court argued that compliance costs are to be considered a ‘risk related factor,’ as they could actually weaken the financial position of MetLife, thereby increasing its vulnerability to financial distress . As a logical consequence, the FSOC should have considered the cost of SIFI determination as a essential consideration to its reasoned rule-making. The absence of this risk-related cost-benefit analysis is therefore a further reason to consider the FSOC’s decision arbitrary and capricious.
The last argument worth considering is the applicability of Chevron deference in this case. Under the Chevron framework, an administrative agency merits deference to a reasonable interpretation of an ambiguous statute . The Court gave due account to the authority of the FSOC in interpreting its own statute. However, the Chevron deference is not granted without any constraint. The Court in fact noted that ‘having formally interpreted congressional intent to require a vulnerability analysis under three separate analytical categories, the FSOC was not free to abandon that approach without explanation ’. The FSOC interpretative guidance created legitimate expectations on MetLife. As a result, when an agency decided to change its policy, it must provide a more detailed justification than what would suffice for a new policy created on a blank slate. The previous interpretation of the final rules disposed by the FSOC was reasoned and consistent with the actual content of the statute, and Chevron deference should be given to this interpretation. Instead, the FSOC carried out the SIFI determination of MetLife in violation of its own interpretation, ignoring statutory elements for the assessment of the potential of material financial distress . Against this backdrop, the Court denied the applicability of Chevron deference to the arguments set forth by the FSOC in the proceeding.
Although the procedural violations of the FSOC are far from being undisputable , the Court’s opinion seems to be particularly relevant from the very macroprudential standpoint. As for the case of a central bank in its price stability objective, the effective conduct of macroprudential policy is based upon the large degree of independence assigned to competent agencies . The efficiency of a macroprudential framework can be seen as a function of the authority’s independent judgment in formulating and implementing those decisions that are supposed to better mitigate systemic risks and negative externalities. Against this backdrop, the acknowledged possibility to repeal a macroprudential policy decision by a court can endanger the independent judgment of the financial stability authority, thereby threatening its capacity to fully exploit its regulatory powers. The consequences for the FSOC can be overwhelming. Courts can now be viewed as ultimate macroprudential policy decision-makers, as they are no constrained in questioning the methodologies used by the agency for its systemic risk assessments and SIFI designations. The FSOC’s discretion and authority therefore end up being substantially weakened, while political parties can now find valid judicial arguments to assert the alleged bias of the agency along with the need of its structural reform .
Regardless of the ultimate outcome of the MetLife case, it is not a surprise that a judgment questioning the reliability of systemic risk assessments by an independent macroprudential authority could be a logical excuse to resist any future macroprudential decision. In the upcoming months the FSOC will find it very difficult to sustain any SIFI determination, since the policy outcomes of the MetLife’s case will provide non-bank financial institutions with incentives to litigate the validity of any future FSOC’s policy move . If the FSOC failed to apply its own methodology as a rational basis to determine that MetLife’s material financial distress may threat the U.S. financial stability, other financial players can be persuaded to challenge the legality of past designations – and of future determinations where issued – based on similar arguments. This may trigger a number of lawsuits where the SIFI review process and the empirical developments of the FSOC’s arguments can be further disputed in view of its alleged ‘arbitrary and capricious’ nature.
A third critical element of the MetLife’s opinion can be found in the condition, specified by the Court, to justify the SIFI determination on the basis of a risk-related cost-benefit analysis. Any macroprudential assessment on systemic risks is featured by a certain degree of uncertainty and unpredictability . Assessing ex-ante the spillover effects of a systemic crisis is problematic due to the number of variables involved, while modeling to what extent the macroeconomic benefits of a SIFI designation are outweighed by the compliance costs imposed on single institutions can be hardly foreseeable ] Against this backdrop, the court’s decision is likely to impose on the FSOC a procedural condition that can be hardly met with certainty. In fact, although the regulatory costs of SIFI compliance can be generally predetermined through regulatory impact analyses, this number should be compared with the quantitative evaluation of MetLife’s failure for the US financial stability. This second part of the analysis contemplated by the court would be critically unrealistic due to the assessment complexity and the ever-evolving paths of macroeconomic dynamics of the market . In other words, the FSOC would be required to provide a rigorous quantitative assessment of the unknown .
The MetLife judgment is likely to pave the way for a general reformulation of the US macroprudential architecture. After the Republican victory of the US Congress, this case can be interpreted as a judicial validation of the financial policy agenda envisioned by the GOP in the so-called ‘Financial Choice Act’ . As further described below, the premises upon which the MetLife opinion is established are likely to reframe the governance structure and the macroprudential powers of the FSOC. Even more relevant, the re-modulation of the macroprudential dimension of the Dodd-Frank is likely to have a substantial impact on the activities of asset managers and other non-bank financial institutions, with critical externalities in terms of risk-taking, leverage and interconnectedness for the whole industry.
The alleged dysfunctions of the FSOC’s designation process are extensively described in the comprehensive outline of the Financial Choice Act . According to the republican proposal, the implausible and speculative scenarios criticized in the MetLife opinion, along with the unconstrained discretionary powers assigned to the FSOC in its SIFI designations, would require a repeal of the FSOC’s institutional framework. The ruling in favor of MetLife, thus, is taken as a proxy to advocate the need for the macroprudential authority to explain – relying on unbiased data and economic analysis – how and to what extent any SIFI designation would make the US financial system safer. In this context, the MetLife case is likely to become instrumental to the implementation of the FSOC’s reform proposed by the GOP. In particular, the Financial Choice Act is intended to repeal the FSOC’s powers to designate non-bank financial companies as SIFIs and impose enhanced prudential requirements or safeguards, such as the prohibition of conducting certain activities deemed systemic. In addition, the previous SIFI designations would be also rescinded while governance structure of the FSOC would be adjusted as to guarantee accountability and transparency of its systemic risk monitoring .
While it is still uncertain to what extent this reform will be concretely introduced in the US financial architecture by amending the Dodd-Frank Act, it can be easily assumed that the MetLife case is likely to play a strategic role in backing the rationale of any FSOC’s reorganization [63l.
4.2. What impact for the Asset Management Industry?
Although the asset management industry is fundamentally different from the traditional banking sector, some of the basic characteristics of its business, such as the use of leverage, inability to delay redemptions, and significant asset concentrations, can be instrumental in spreading the seeds of instability throughout the financial system . Large asset managers can find in the MetLife case an alibi to neglect their systemic role in the credit intermediation process and delay any internalization of the systemic costs related to their leveraged products, including mutual funds, exchange-traded funds, hedge funds and private equity fund. Due to this, the asset management industry can be persuaded to increase their leverage and interconnectedness, thereby contributing to amplify and transmit the potential for financial shocks across the market.
On the one side, some have hailed the decision on MetLife as a significant step toward a structural reform that would limit the excessive powers of federal government and its negative influence on financial markets  On the other side, the FSOC has stated how this decision is fundamentally wrong and dangerous as it neglects the policy lessons learnt during the financial crisis . Certainly, the court’s decision can be regarded as a powerful impediment toward the development of a broad macroprudential regime for nonbanks in the US. By having legitimized the opponents of Dodd-Frank’s macroprudential dimension, this decision can finally become the policy ground upon which deconstructing – at least, in part – the regulatory layer targeting systemic risks out of the banking system. What this may entail for the stability of the financial system can be overwhelming. The path toward an accomplished macroprudential framework in the US seems no longer viable and future congressional changes will more likely reduce the legislative and institutional safeguards against systemic risks . In this context, one may question the implicit costs that this decision may have for the resilience of the markets. And, although the answer cannot be easily determined at the current stage, it seems these costs will largely offset the prudential savings granted – at least, for now – to MetLife.
Luca Amorello is a LLM candidate and Teaching Assistant at Harvard Law School and is a PhD Candidate in Law & Economics of Money and Finance at the House of Finance – Goethe University of Frankfurt.
This research was made for the course of ‘Regulation of Financial Institutions’, held at Harvard Law School in the winter term of 2016. The author is grateful to Professor Howell E. Jackson and Ms. Margaret E. Tahyar for their helpful comments and discussions on macroprudential policy in the USA.
. For a thorough analysis of the US regulatory reforms in the aftermath of the financial crisis, inter alia see Acharya, V.V.; Cooley, T.F.; Richardson, M.P.; Walter, I. Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, New York University Stern School of Business, Myron Scholes (Foreword by), Wiley: NY, USA, 2010.
. For a general discussion of macroprudential approach to regulation, see Bernanke, B.S. Implementing a Macroprudential Approach to Supervision and Regulation, Speech held at the 47th Annual Conference on Bank Structure and Competition, Chicago, Illinois, May 5, 2011. See also Franklin, A.; Carletti, E. Systemic Risk and Macroprudential Regulation, In ‘The Global Macro Economy and Finance’, Palgrave Macmillan, London, UK, 2012, 191-210.
. For more insights on the US macroprudential stress testing, see Greenlaw, D.; Kashyap, A.K.; Schoenholtz, K.L.; Shin, H.S. Stressed Out: Macroprudential Principles for Stress Testing, Chicago Booth Res. Pap. No. 08, 2012.
. For an empirical analysis of US bank holding companies’ resilience following the prudential reforms introduced in US after 2009, see Oliver Wyman, Post-Crisis Changes in the Stability of the US Banking System Evidence from US Bank Holding Companies from 2004 to 2014, Mar. 2015.
. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376, 2010. For an overview of the FSOC’s structure and governance, see Gersen, J. Administrative Law Goes to Wall Street: The New Administrative Process. Administrative Law Review 65(3), 693-703, 2013. For a critical evaluation of the FSOC and its powers, inter alia, see Allen, H. Putting the Financial Stability in Financial Stability Oversight Council. Ohio State Law Journal 76(5), 1087-1152, 2015. In general, see also: Ludwig, E. Assessment of Dodd-Frank Financial Regulatory Reform: Strengths, Challenges, and Opportunities for Stronger Regulatory System. Yale Journal on Regulation 29(1), 181-200, 2012.
. Skinner, Christina Parajon, Regulating Nonbanks. Georgetown Law Journal, Vol. 105, 2017.
. Norchi, F. Deference Debate and the Role of Cost-Benefit Analysis in Financial Regulation: MetLife v. Financial Stability Oversight Council. North Carolina Banking Institute 21, 253-276, 2017.
. For a critical overview of the SIFI determination process and its transparency see Hockett, R.C. Oversight of the Financial Stability Oversight Council: Due Process and Transparency in Non-Bank SIFI Designations, Corn. Legal Stud. Res. Pap. No. 16-20, 2015. For an overview of rules and guidance for SIFI designation, see Kini, S.; Luigs, D.; Alspector, E. (2012). FSOC Releases Proposed Rule and Guidance on Its Process to Designate Nonbank Firms as Systemically Significant. Banking Law Journal 129(3), 234-241. See also Kini, S.; Lee, P.; Lyons, G.; Luigs, D. (2011). Financial Stability Oversight Council Issues Proposal on Designation of Systemically Important Firms, Volcker Rule Study, and Study on Financial Sector Concentration Limits. Banking Law Journal 128(4), 377-384; Avery, A.; Scott, K.; Carson, L. (2010). Dodd-Frank Act Attempts to Curtail Systemic Risk. Banking Law Journal 127(8), 766-778. For the skeptical stamdpoint about the legitimacy of teh SIFI designation methodology, see Holtz-Eakin, D., The Arbitrary and Inconsistent Non-Bank SIFI Designation Process, United States House of Representatives Committee on Financial Services Oversight and Investigations Subcommittee, American Action Forum, March 28, 2017.
. FSOC, 12 CFR Part 1310 RIN 4030–AA00, Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, Federal Register Vol. 77, 2012.
. For more details on the SIFI designation process, see Raice, P.D.; Lamonica, R.C.; The Framework for Buying a Community Bank, Banking L.J. 2012, 129, 405-418; Butler, W.M. Falling on Deaf Ears: The FSOC’s Evidentiary Hearings Provides Little Opportunity to Challenge a Nonbank SIFI Designation, N.C. Banking Inst. 18, 2013, 665-668.
. For details, see FSOC, Basis for the Financial Stability Oversight Council’s Final Determination Regarding MetLife, Inc., U.S. DEP’T OF THE TREASURY 4, Dec. 18, 2014 (http://www.treasury.gov/initiatives/fsoc/designations/Documents/MetLife%20Public%20Basis.pdf) (last visited: March 7, 2017).
. FSOC, 12 CFR Part 1310 RIN 4030–AA00, Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, Federal Register Vol. 77, 2012, at 21641.
. FSOC, 12 CFR Part 1310 RIN 4030–AA00, Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, Federal Register Vol. 77, 2012, at 21642.
. See Raice, P.D.; Lamonica, R.C.; The Framework for Buying a Community Bank, Banking L.J. 2012, 129, 405-418; Butler, W.M. Falling on Deaf Ears: The FSOC’s Evidentiary Hearings Provides Little Opportunity to Challenge a Nonbank SIFI Designation, N.C. Banking Inst. 18, 2013, 665-668..
. See FSOC, Basis for the Financial Stability Oversight Council’s Final Determination Regarding MetLife, Inc., Dec. 18, 2014, at 4. For a general inquiry of how insucrance companies can generate systemic risk, see Schwarcz, D.; Schwarcz, S. (2014). Regulating Systemic Risk in Insurance. University of Chicago Law Review 81(4), 1569-1640.
. For details see FSOC, Basis for the Financial Stability Oversight Council’s Final Determination Regarding MetLife, Inc., Dec. 18, 2014, at 14, 18.
. FSOC, Basis for the Financial Stability Oversight Council’s Final Determination Regarding MetLife, Inc., Dec. 18, 2014, at 2.
. FSOC, Basis for the Financial Stability Oversight Council’s Final Determination Regarding MetLife, Inc., Dec. 18, 2014, at 17.
. FSOC, Basis for the Financial Stability Oversight Council’s Final Determination Regarding MetLife, Inc., Dec. 18, 2014, at 21.
. FSOC, Basis for the Financial Stability Oversight Council’s Final Determination Regarding MetLife, Inc., Dec. 18, 2014, at 24.
. See MetLife Inc, v. Financial Stability Oversight Council, Case 1:15-cv-00045, Jan. 13, 2015.
. See MetLife Inc, v. Financial Stability Oversight Council, Case 1:15-cv-00045, Jan. 13, 2015, at 3. For more insights into the arbitrary and capricious standard applied by the FSOC, see Meyerson, L.A. Metlife: FSOC “Too-Big-to-Fail” Designation, Harvard Law School Forum on Corporate Governance and Financial Regulation, May 2, 2016 (https://corpgov.law.harvard.edu/2016/05/02/metlife-fsoc-too-big-to-fail-designation/) (last visited: December 3, 2016). See also Raice, P.D.; Lamonica, R.C.; The Framework for Buying a Community Bank, Banking L.J. 2012, 129, 405-418, at 441.
. See MetLife Inc, v. Financial Stability Oversight Council, Case 1:15-cv-00045, Jan. 13, 2015, at 2. The violation of MetLife due process rights is further discussed in Butler, W. Falling on Deaf Ears: The FSOC’s Evidentiary Hearings Provides Little Opportunity to Challenge Nonbank SIFI Designation. North Carolina Banking Institute 18(2), 663-692, 2014, where the author argues that the evidentiary hearing procedure under Dodd-Frank limit the ability of a firm to challenge its SIFI designation.
. MetLife, Inc. v. Financial Stability Oversight Council, C.A. No. 15-0045 (D.D.C. Mar. 30, 2016). For details on background and context of the judgement, see Brewin, P. MetLife’s SIFI Designation and Appeal. Review of Banking and Financial Law 34(2), 435-442, 2015.
. 12 U.S. Code § 5323(h) (Dodd Frank Act § 113(h)).
. MetLife, Inc. v. Financial Stability Oversight Council, 2016 U.S. Dist. LEXIS 46897, *21, 177 F. Supp. 3d 219 (D.D.C. 2016).
. MetLife, Inc. v. Financial Stability Oversight Council, 2016 U.S. Dist. LEXIS 46897, *29, 177 F. Supp. 3d 219 (D.D.C. 2016).
. MetLife, Inc. v. Financial Stability Oversight Council, 2016 U.S. Dist. LEXIS 46897, *38, 177 F. Supp. 3d 219 (D.D.C. 2016).
. See Meyerson, L.A. Metlife: FSOC “Too-Big-to-Fail” Designation, Harvard Law School Forum on Corporate Governance and Financial Regulation, May 2, 2016 (https://corpgov.law.harvard.edu/2016/05/02/metlife-fsoc-too-big-to-fail-designation/) (last visited: December 3, 2016).
. Michigan v. Environmental Protection Agency, 135 S. Ct. 2699 (2015). For a thorough discussion of this case and the implications of the underlying cost-benefit analysis, inter alia, see McGraw, A. Costs before Regulation: Michigan v. EPA and the Implicit Prerequisite. American Journal of Trial Advocacy 40(1), 175-200, 2016.
. MetLife, Inc. v. Financial Stability Oversight Council, 2016 U.S. Dist. LEXIS 46897, *51-52, 177 F. Supp. 3d 219 (D.D.C. 2016).
. King v. Burwell, 135 S. Ct. 2480, 2488 (2015). For details on the Chevron doctrine inter alia see Timothy K. Armstrong, Chevron Deference and Agency Self-Interest, 13 Cornell J.L. & Pub. Pol’y 2, 203, 286 (2004). See also: May, R. Defining Deference Down: Independent Agencies and Chevron Deference. Administrative Law Review 58(2), 429-454, 2006; Cooney, J. Chevron Deference and the Dodd-Frank Act. Administrative Regulatory Law News 37(3), 7-9, 2012; Shami, A. Three Steps Forward: Shared Regulatory Space, Deference, and the Role of the Court. Fordham Law Review 83(3), 1577-1620, 2014.
. MetLife, Inc. v. Financial Stability Oversight Council, 2016 U.S. Dist. LEXIS 46897, *37, 177 F. Supp. 3d 219 (D.D.C. 2016).
. See MetLife, Inc. v. Fin. Stability Oversight Council, 2016 U.S. Dist. LEXIS 46897, *36-37, 177 F. Supp. 3d 219 (D.D.C. 2016).
. For a general overview of the administrative criticalities in the FSOC’s designation, see Gilson, R.J. et al., Brief of Professors of Law and Finance as Amici Curiae Supporting Defendant: MetLife, Inc. v. Financial Stability Oversight Council, No. 15-00045 in the U.S. District Court for the District of Columbia, May 22, 2015.
. See Duff, A.W.F. Central Bank Independence and Macroprudential Policy: A Critical Look at the U.S. Financial Stability Framework, Berkeley Bus. L.J. 11, 205, 2014. See also International Monetary Fund, Macroprudential Policy: An Organizing Framework, March 14, 2011, at 3.
. See LaCapra, L.T. MetLife ruling bolsters other firms arguing systemic unimportance, Reuters, March 31, 2016 (http://www.reuters.com/article/usa-banks-size-idUSL2N1730UZ) (last visited: December 3, 2016).
. The complexity of systemic risk assessments is described among others in Hansen, P.P. Challenges in Identifying and Measuring Systemic Risk, NBER Work. Pap. No. 18505, 2012.
. It is worth noting that some scholars have sought to rebut this argument by claiming for the existence of a number of systemic-risk measurement tools, including Value-at-Risk models and stress tests, that FSOC could use to quantify the extent of MetLife’s systemic risk to the economy. See Brief of Amici Curiae Academic Experts in Fin. Regulation in Support of Appellee and Affirmance, MetLife, Inc. v. Fin. Stability Oversight Council, No. 16-5086, 2016 WL 4440274 (C.A.D.C. Aug. 22, 2016), pp. 24-25. The FSOC could have provided an estimation of the MetLife’s contribution to systemic risk by testing the amount of assets needed to cover possible losses and the viability of the firm in a bench of different ipothetical stress scenarios. These tools, however, are not far from criticism, as they widely rely on a number of arbitrary assumptions. Among other, see Simons, K., The Use of Value at Risk by Institutional Investors, New England Economic Review, 21–30, Nov./Dec. 2000; Acharya, V.V., Engle, R. & Pierret, D., Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights, NBER Working Paper No. 18968, 2013. In addition, this stance overlooks the function of the FSOC’s designation that is precisely to subject asset managers to enhanced prudential supervision, including stress testing and systemic risk measuring. In other words, it is only with the designation of MetLife as a SIFI that the FSOC would be capable of measuring its contribution to systemic risk by means of an advanced risk-measurement framework.
. The Financial Choice Act is constructed as an ‘Amendment in the Nature of a Substitute to H.R.5983 Offered by Mr. Hensarling of Texas, Sep. 12, 2016, (http://financialservices.house.gov/uploadedfiles/bills-114hr-hr5983-h001036-amdt-001.pdf).
. See House Committee on Financial Services, The Financial Choice Act – Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs, June 23, 2016 ( http://financialservices.house.gov/uploadedfiles/financial_choiceact_comprehensive_outline.pdf).
. For a thorough explanation of the amendments on the FSOC’s structure and powers see House Committee on Financial Services, The Financial Choice Act – Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs, June 23, 2016, (http://financialservices.house.gov/uploadedfiles/financial_choiceact_comprehensive_outline.pdf), at 33, 44. In addition, for a discussion on the accountability and transparency flaws featuring the FSOC framework, see also Holtz-Eakin, D., FSOC Accountability: Nonbank Designations, United States Senate Committee on Banking, Housing, and Urban Affairs, American Action Forum, Mar. 25, 2015.
. On the issue, see Brush, B. Trump’s Bank-Regulation Rollback May Get Boost From EU Rules, Bloomberg, Nov. 28, 2016 (https://www.bloomberg.com/news/articles/2016-11-28/trump-s-regulatory-rollback-may-get-a-boost-from-eu-bank-rules) (last visited: December 3, 2016).
. See Cecchetti S.G.; Schoenholtz, K.L. Too Big to Fail: MetLife v. FSOC, Money & Banking, April 4, 2016 (http://www.moneyandbanking.com/commentary/2016/4/4/too-big-to-fail-metlife-v-fsoc) (last visited: December 3, 2016).
. See CFA Institute, Notice Seeking Comment on Asset Management Products and Activities, Docket No. FSOC-2014-0001, March 25, 2015, at 1. For a detailed survey on asset managers and systemic risk, see International Monetary Fund, The Asset Management Industry and Financial Stability, Global Financial Stability Report, April 2016, 93, 135.
. For example, see Stevens, P.S. A MetLife Victory Won’t Solve FSOC’s Biggest Problems, American Banker, June 13, 2016 (http://www.americanbanker.com/bankthink/a-metlife-victory-wont-solve-fsocs-biggest-problems-1081438-1.html) (last visited: 9 March 2017).
. See Statement from Treasury Secretary Jacob J. Lew On MetLife V. Financial Stability Oversight Council, April 7, 2016, (https://www.treasury.gov/press-center/press-releases/Pages/jl0410.aspx) (last visited: 9 March 2017).
. In fact, this seems one of the ultimate purposes of the Financial Choice Act, as it is supposed to repeal the supervisory and designation powers of the FSOC. See House Committee on Financial Services, The Financial Choice Act – Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs, June 23, 2016, ( http://financialservices.house.gov/uploadedfiles/financial_choiceact_comprehensive_outline.pdf), at 43.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 § 5323
 § 113
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 V.