Usually, it's a good thing to be considered important -- unless you are talking about financial institutions being systemically important enough to cause economic upheaval if they fail, prompting extra governmental oversight. For banks, this is a category that includes the biggest and most powerful, such as Bank of America (BAC 3.35%) and JPMorgan Chase. These institutions may not like this designation, or the scrutiny that goes along with it, but they expect it as a part of doing business.
For companies such as General Electric (GE -3.19%) and MetLife (MET 1.66%), however, the designation as a systemic risk may be unwanted -- and, according to some company officials -- unwarranted.
Dodd-Frank's attempt to protect the system from collapse
The Financial Stability Oversight Council, created by the Dodd-Frank legislation and overseen by the Treasury, is currently considering a handful of non-banks for the status of systemically significant: Insurers AIG (AIG 1.70%), Prudential (PRU 1.76%), and MetLife, in addition to GE.Recently, both GE and AIG were notified that they had entered a third stage of review to determine if they pose a high risk to the financial system.
While the mission of the FSOC is laudable, at least one company has found the council's dedication to avert another financial crisis a bit of a headache. Last spring, MeLlife's president testified at a congressional hearing that insurance companies should not be held to the same stringent capital requirements as banks. It isn't difficult to understand this point of view, since the insurer's banking arm reflected less than 2% of earnings for last year.
Finding its pleas falling on deaf ears, MetLife has been striving to rid itself of its banking arm in an attempt to get out of regulators' sights. Its plan to sell its bank business to GE Capital has been stalled by the Federal Deposit Insurance Corporation, whose blessing is necessary for the deal to close. The insurer is so desperate to leave the financial sector behind that the parties have now agreed to change the destination of MetLife's bank deposits to GE Capital Retail Bank -- which is overseen by the Office of the Comptroller of the Currency, rather than the FDIC.
As for giant insurer AIG, the recent stock sales that reduced the government's ownership of the company has exposed the company, the owner of a small bank, to increased regulation by the Federal Reserve.
One Fool's take
The reality of heightened federal oversight of non-bank entities is here to stay, since Dodd-Frank gives the FSOC wide latitude to decide which of these companies poses significant financial risk to the economy. Since AIG has proved that it certainly fits that profile, chances are good that the shoe will fit, and AIG will be forced to wear it.
As for MetLife, it should be out from under the government's intense gaze as soon as its amended deal with GE closes. GE, of course, is bulking up its banking business with this purchase, which makes the high-risk designation look more probable for this company.
While these companies don't welcome additional rules and regulations, there is no reason to believe that more oversight will hurt their profits any more than it does the large banks'. Hopefully, the new rules, equitably applied, will help keep the financial system on an even keel -- which should help safeguard everyone's bottom line.
