By Dena Aubin and Lisa Lambert
(Reuters) - A federal court's striking down of the government's designation of insurer MetLife Inc <MET.N> as "too-big-to-fail" could undermine efforts to head off another financial crisis, authors of the landmark Dodd-Frank Wall Street reform law said.
In a brief filed on Thursday with a federal appeals court, former Senator Chris Dodd, former Representative Barney Frank and 18 other heavyweight Democrats including Representative Nancy Pelosi said the decision could make it difficult to prevent another "calamitous financial meltdown."
At the same time, Ben Bernanke, who chaired the Federal Reserve during the 2007-2009 crisis, and Paul Volcker, another former Fed chairman who helped craft Dodd-Frank, filed a brief.
A major consequence of the decision "is that one of the world's largest, most highly interconnected financial institutions is left with inadequate oversight," they wrote.
In March U.S. District Court Judge Rosemary Collyer rescinded the government's 2014 designation of MetLife as a systematically important financial institution.
Dodd-Frank had created the Financial Stability Oversight Council, consisting of the heads of regulatory agencies, in part to identify firms that could wreck the U.S. financial system if they experience distress. The council's designations trigger stricter regulatory oversight and requirements to hold more capital.
Collyer called the MetLife designation "arbitrary and capricious," saying the council never adequately assessed the risk of Metlife's failure and neglected to perform a cost-benefit analysis of applying the designation.
The council laid out its arguments for its appeal of the decision in a brief filed last week.
"The broad array of legislators, policy officials, economists, insurance experts and other scholars who filed in support of FSOC makes clear that FSOC's designation of MetLife fully complied with the law and applied the lessons of the financial crisis," said a Treasury spokesman.
In a press conference about the lawmakers' brief, Frank said the decision is an invitation "to engage in riskier behavior" and that it imposes "some obstacles to us trying to protect society."
In the brief the lawmakers also said FSOC does not have to find a company is financially vulnerable before it makes a designation.
"Seemingly healthy institutions can defy widely held expert forecasts, collapse quickly and then threaten economic damage on a catastrophic scale," they wrote, adding Dodd-Frank does not require cost-benefit analyses.
American International Group <AIG.N>, Prudential Financial Inc. <PRU.N> and General Electric Co's <GE.N> are also labeled systemically important.
MetLife will respond to the court in its own brief in August.
(This story has been refiled to add judge's last name, Judge Rosemary Collyer, not Judge Rosemary, in fifth paragraph)
(Reporting by Dena Aubin in New York, additional reporting by Lisa Lambert in Washington; editing by Dan Grebler and Cynthia Osterman)