Seven years ago, a federal judge ruled that the Financial Stability Oversight Council fumbled by not accounting for regulatory costs when it deemed MetLife “too big to fail” and placed the insurance giant under Federal Reserve oversight. The MetLife decision was a massive win for industries that had chafed under post-financial crisis reforms allowing FSOC to impose bank-like regulations on individual insurance companies, asset managers and hedge funds that are deemed “systemically important financial institutions.” As Treasury Secretary Janet Yellen and top Biden regulators move to reassert those powers, which were dismantled by the Trump administration, Wall Street lobbyists are cracking open the playbook that got MetLife off the hook. FSOC’s proposal cuts changes spearheaded by former Treasury Secretary Steven Mnuchin that require the Council to conduct a cost-benefit analysis before tagging any nonbank as systemically important. BlackRock and Fidelity Investments took aim at the shift in recent comment letters. So did the American Investment Council, which represents the private equity industry, the U.S. Chamber of Commerce and the Insurance Coalition. The council’s contention that it doesn’t need to weigh the regulatory costs that will be borne by a potential SIFI “ignores the fundamental principles of administrative law underlying the district court’s decision,” American Property Casualty Insurance Association’s Matthew Vece and Stephen Broadie wrote. But there’s a reason Biden regulators don’t think cost-benefit is necessary. The relevant section of the 2010 Dodd-Frank law doesn’t specifically call for that analysis and, had the Trump administration followed through on an appeal of the MetLife decision, “I like to think that it would have been overturned,” Kathryn Judge, a professor and vice dean at Columbia University Law School, told your host. “It's very easy in the abstract to say — generally speaking — that we shouldn't be creating rules, where the benefits don't generally exceed the cost,” she said. But “there's a huge difference between that conceptual framework and imposing legal requirements [that], as a practical matter, really slow down and tend to tilt the regulatory process towards outcomes that under-regulate. Particularly when we're talking about risk that inherently involves some degree of speculation,” Judge added. In other words, it’s hard to say exactly how much financial agony a SIFI designation could prevent when you’re forecasting a crisis that hasn’t occurred. And, as Judge and 31 other academics wrote in a recent comment letter to FSOC, conducting a cost-benefit analysis would be “more likely to impede than promote appropriate oversight” in this context. Yellen made a similar point when FSOC rolled out the proposal in April, according to the meeting minutes, arguing that some of the Trump-era changes create an “unrealistic timeline that could prevent the Council from acting to address an emerging risk to financial stability before it was too late.” Still, the scrutiny and restrictions that would hit any non-bank financial institution that’s deemed systemically important would come at a cost. And given the degree to which the insurance, private equity, mutual fund and asset management industries are taking aim at the cost-benefit component of FSOC’s proposal, it’s also a sign of what’s to come if Biden administration regulators follow through. “It would stand to reason that it would be subject to a new challenge,” said one insurance industry lobbyist. “It feels really obvious.” IT’S MONDAY — Any other angles to the FSOC proposal that you’re pondering? Let us know. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.
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