Questions concerning the nature, magnitude, scope, management, oversight, and supervision of systemic risk have dominated research and policy regarding financial service providers following the 2007-2009 crisis. The September 2008 collapse and federal government rescue of American International Group (AIG) in particular have had an enormous influence on regulatory policy. Section 113 of the 2010 Dodd-Frank Act established the Financial Stability Oversight Council (FSOC) with authority to designate systemically important nonbank financial institutions (nonbank SIFIs) for enhanced supervision by the Board of Governors of the Federal Reserve “[I]f the Council determines that material financial distress at the U.S. nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company could pose a threat to the financial stability of the United States.”
Acharya et al define SRISK as a macro-finance measure of systemic risk to furnish “an estimate of the amount of capital that a financial institution would need to raise in order to function normally if we have another financial crisis.” SRISK measures the “expected capital shortfall” of an institution during a financial crisis, defined as the “projected market capitalization” if equity markets declined by 40% based on historical stock market correlations (i.e. equity beta) minus the “prudent market capitalization,” defined as greater than or equal to 8% of total assets, a leverage ratio.
Acharya and Richardson use SRISK to argue that select insurers are as vulnerable to large capital shortfalls as are banks in stressed macroeconomic environments. In this paper, we argue the inappropriateness of SRISK as a measure of systemic risk for insurers.
Thank you, Jerry, and congratulations to Alison Watson on becoming the new Chancellor of the Exchequer Club. I hope your new position does not cause Northwestern Mutual to be deemed systemically important.
I am pleased to have this opportunity to speak to the members of the Exchequer Club ─ including my colleague Heather Wingate, who is head of global government relations for MetLife and a Club member.
In my remarks today, I will ─
Provide some background on MetLife;
Describe ─ in general terms ─ our interactions with FSOC;
Discuss our legal challenge to our designation as a systemically important company; and
Propose an alternative to the FSOC designation process.
One of the themes of this year’s Capital Markets Summit is how efforts to eradicate risk from the financial system can have serious unintended consequences. Nowhere is that more true than in the U.S. life insurance industry.