When MetLife announced its spin-off strategy, some argued that this augured still more skinnying-down by systemic U.S. banks. It might – who knows what activist investors could push vulnerable management to do. But, before rushing to the barricades to proclaim the demise of U.S. banking behemoths, it’s worth parsing why MetLife did what it did and whether, even if a big bank wanted to emulate it, it could or should.
Based on publically-available information, the driving forces behind MetLife’s decision are regulatory arbitrage and investor demand. MetLife knows that FRB capital requirements for companies that are or control insurers dramatically change the business model even before anyone officially knows what these rules will say. MetLife sought first to duck this by divesting its insured depository and, now, by restructuring itself far more fundamentally.
It remains to be seen if all this arbitrage will earn MetLife the get-out-of-jail-free card it seeks from SIFI regulation. It is clearly sufficiently guarded about its prospects that it has retained the fall-back litigation effort. However that fares, MetLife has won investor approval for its announcement that divestiture of capital-intensive businesses will proceed regardless of all MetLife’s ongoing anti-SIFI activism. Investors may well conclude that the legacy company is still systemic and kick the stock price back down again, but for now MetLife’s a winner and these days that isn’t easy.
Assume for the moment that MetLife makes a successful break from the smothering embrace of systemic regulation for both the legacy and successor firm. Could giant banks follow its lead? I don’t think so because neither regulatory-arbitrage maneuvering nor long-term investor gratification is likely unless a big bank engages in so much self-evisceration that its fundamental business franchise goes bye-bye.
Let’s parse the reasons why de-SIFIcation can’t work for GSIBs as it is likely to do for GE Capital and might for MetLife. First, all of their U.S. operations are huge. MetLife’s retail-facing U.S. assets total about $240 billion, but all of the GSIB U.S.-domiciled activities (remember foreign branches count here) are well above the $50 billion threshold in Dodd-Frank as well as generally far beyond $500 billion. In short, for any U.S. GSIB to stay in the U.S. – which all of them must – none of them can get out of being a GSIB.
But, even if a legacy firm is once and always a SIFI, might U.S. GSIBs still divest enough so that a successor spin-off escapes SIFI designation as MetLife hopes for its retail operations? I doubt it. Any GSIB activity large enough to have meaningful franchise-value benefit for the legacy company after divestiture would on its own still trigger at least one of the systemic-designation drivers (size, complexity, inter-connectedness, substitutability, cross-border operations). Further and still more daunting, FSOC and the FRB would look askance at any restructuring at a U.S. GSIB not demanded by its resolution plan but instead derived from a desire to realize regulatory-arbitrage advantage.
Yes, the FSOC and FRB want big banks to get smaller and simpler. But they also want to ensure that critical activities do not flee into the “shadows.” Getting one’s cake – smaller GSIBs – without eating it too by way of new, enormous shadow companies – is essentially impossible.
To be sure, the U.S. GSIBs are unwieldy, complex, and problem-prone. But, much of the nation’s vital financial infrastructure remains in their hands. To the extent it flies their coop – think tri-party repos – a new set of risks results. Just getting big banks out of critical businesses does not solve for the risk the businesses pose, just moves it.