Not Too Big to Fail. Too Expensive to Exist

by Edward O'Brien 0

Forget too-big-to-fail.

The operative question for the country’s largest financial firms is increasingly whether the government has made it too expensive to be big.

On Tuesday, insurer MetLife Inc. became the second major firm in the past 10 months to decide that the demands of being “systemically important” in the eyes of regulators may outweigh the benefits of continuing to operate at its current size. General Electric Co. made the same choice in April for its giant finance arm, GE Capital.

The moves show that while the U.S. government hasn’t heeded populist calls to “break up” the nation’s largest financial firms, those demands are at times being answered through indirect pressure from regulators.

Next up could be MetLife rivals Prudential Financial Inc. and American International Group Inc., analysts say. The latter is facing a challenge from investors, including Carl Icahn, who argue in part that the firm is “too big to succeed” given the regulatory requirements it now must meet that restrain profits.

With capital requirements increasing for financial institutions, and particularly for the largest banks and insurance companies, the cost of being extremely large is becoming problematic for some. For these organizations, money that might be used to expand the business must be retained to meet the government’s increased capital requirements for “systemically important” FIs. These requirements could cause the largest institutions to reprioritize the use of their capital. It could also create opportunities for other, smaller institutions that want to increase their market share in select markets.

Overview by Ed O’Brien, Director, Banking Channels Advisory Service at Mercator Advisory Group

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