“This Court cannot affirm a finding that MetLife’s distress would cause severe impairment” on the financial markets, the ruling said.

The case is a huge test of a central mission of the 2010 financial reform package, known as Dodd-Frank — identifying financial firms, outside of banks, that could pose a threat to the economy. These firms have traditionally received little government scrutiny. But after the massive insurance company AIG nearly collapsed in 2008 and required a $182 billion taxpayer bailout, lawmakers called for stricter oversight of this portion of the financial industry.

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If the ruling is not overturned — the Justice Department is expected to appeal — it could cripple the panel, known as the Financial Stability Oversight Council, put in place to run the process, according to financial industry policy experts. If FSOC must meet new, higher standards for declaring a company “too big to fail,” the system would come to a standstill, they said.

The court’s decision “is doubly dangerous and incorporates onerous new burdens on agencies that will cripple financial reform,” said Dennis Kelleher, president and chief executive of Better Markets, a watchdog group. The court is setting “an impossible standard,” he said.

In an unusually lengthy public statement, Treasury Secretary Jack Lew, who leads the panel, said the decision ignores the lessons of the financial crisis, while imposing new requirements on FSOC not called for by Congress.

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“This decision leaves one of the largest and most highly interconnected financial companies in the world subject to even less oversight than before the financial crisis,” Lew said.

“Some opponents of financial reform have hailed the court’s decision as a win for our financial system. This is wrong and dangerously ignores the lessons of the financial crisis,” Lew said. “FSOC’s authority to designate nonbank financial companies is a critical tool to address potential threats to financial stability, and it has made our financial system safer and more resilient.”

So far, the government panel has labeled four firms — AIG, Prudential, General Electric’s financing arm and MetLife — as “systemically important financial institutions,” subjecting them to tougher government rules.

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General Electric is now arguing that it no longer qualifies for the designation because it has shrunk its balance sheet. But MetLife, which was founded in 1868 and has a global footprint of 100 million customers and a market capitalization of $48 billion, filed a lawsuit that now threatens the entire process.

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Collyer, the judge in the case, first struck down the company’s “too big to fail” designation last week. But she did not explain the ruling until Thursday, when she criticized the the government panel’s handling of the case. The panel found that MetLife would cause significant damage to the U.S. economy but did not explain how, she said. It also didn’t consider the cost of the designation to MetLife, Collyer said.

“Indeed, the Final Determination hardly adhered to any standard when it came to assessing MetLife’s threat to U.S. financial stability,” the ruling said. “Every possible effect of MetLife’s imminent insolvency was summarily deemed grave enough to damage the economy.”