By Lisa Lambert
WASHINGTON (Reuters) - The top U.S. financial regulators ventured into uncharted legal territory on Friday, as they weighed the future of their appeal in a long-running case over their labeling of MetLife Inc <MET.N> as "too big to fail."
Almost everyone expected Republican President Donald Trump to withdraw the appeal, filed by the Obama administration, soon after taking office, said Douglas Holtz-Eakin, who served as chief economist for former President George W. Bush.
Withdrawal would let stand a judge's 2016 decision that MetLife, the country's largest life insurer, should not be designated a "systemically important financial institution," a relatively new label that triggers heightened oversight and capital requirements.
Instead, both MetLife and the U.S. government have repeatedly asked for delays in the case since Trump's inauguration. MetLife is currently considered "dedesignated."
On Friday the Financial Stability Oversight Council(FSOC) that makes the designations, consisting of the Treasury Secretary, Federal Reserve Chair and other regulatory chiefs, met to discuss the case. Because FSOC is a new body, no one is sure of the next legal step.
The council did not make any announcement after the meeting.
Critics of designation, including Holtz-Eakin, say that since the Obama administration asked the Justice Department to file the appeal and represent the FSOC, the Justice Department can simply withdraw the appeal.
Trump has ordered U.S. Treasury Secretary Steve Mnuchin to review FSOC and the designation process, after expressing skepticism of both.
"We believe the Trump administration should support an abeyance in the case until the review of the FSOC designation process is complete, which could lead to the dismissal of the appeal," said MetLife in a statement to Reuters.
Withdrawing the appeal could ease the way for the "systemically important" non-banks - American International Group <AIG.N> and Prudential Insurance <PRU.N> - to also shed the label.
Supporters of the Dodd-Frank regulatory reforms that came out of the 2007-2009 financial crisis want the appeal to proceed.
Non-profit lobby group, Better Markets, Inc. that pushes for a strict interpretation of the Dodd-Frank financial regulations, recently asked the court to appoint independent counsel for FSOC, saying the Justice Department cannot represent both the council and the Trump administration.
It also believes that FSOC, in removing designations, should follow steps similar to those for making a designation, namely an extensive review, said Dennis Kelleher, Better Markets president.
"FSOC is created by statute and it has duties and obligations under its statute," he said. "It should not and cannot abdicate its duties to a single district judge."
(This version of the story corrects headline to show the appeal is the government's, not MetLife's, and clarifies that they are not weighing whether to appeal)
(Reporting by Lisa Lambert)