Fri | Aug 18, 2017

GE Capital no longer 'too big to fail'

Published:Friday | July 1, 2016 | 7:00 AM

GE Capital, the financing unit of General Electric Company, won approval from federal regulators to drop its designation as a "systematically important financial institution", or too big to fail, a title that comes with added scrutiny and stricter rules.

GE and the Financial Stability Oversight Council (FSOC) - a group of top regulators charged with monitoring risks to the system - announced the decision Wednesday. The council was created by the financial overhaul law that came in the wake of the 2008 financial crisis that plunged the country into recession.

The label, which has been handed out by the council starting in 2013 to nonbank financial firms, is given to companies that the United States regulator deems so large that their failure could threaten the entire economy.

Along with stricter supervision, being designated a "systematically important financial institution" can be costly for a company. Life insurer MetLife has sued the US to remove the title.

GE Capital was given the label three years ago. The company pushed the US to drop it in March, arguing that it sold many of its assets, making it a much smaller lender. Today, GE Capital is focusing on offering loans to companies that want to buy GE's industrial products, such as airplane engines or medical equipment.

In a statement about its decision, the FSOC said GE Capital is now "significantly smaller and safer".

US Treasury Secretary Jacob Lew, who heads the council of top regulators, said the decision clearly shows "a two-way process.

"The council will remove a designation when that company no longer poses risks to US financial stability," Lew said in a statement. "The council follows the facts. When it identifies a company that could threaten financial stability, it acts; when those risks change, the council also acts."

Republican lawmakers, who voted against the overhaul law that created the council, have criticised it as overreaching and making arbitrary decisions on companies.

The council said Wednesday that its decision to remove the label for GE Capital "was based on extensive quantitative and qualitative analyses of GE Capital, taking into account the company's businesses and activities".

When it made its case to the council in March, GE Capital said it had reduced its assets by 52 per cent to US$265 billion. Loans to consumers were down 95 per cent, from US$72 billion to US$4 billion, and they were down to zero in the US.

The story is very different in the MetLife case, where the council is fighting a federal judge's decision to toss out its labelling of MetLife on the grounds it was "arbitrary and capricious." The regulators failed to consider possible financial harm to the insurance giant from the action, backtracking on their own standards, the judge said.

The ruling in April, which the council is appealing, was a setback to the government's policy for preventing another financial crisis using new legal tools.

The other nonbank financial firms to be given the label by the council are insurers American International Group Inc and Prudential Financial Inc.

- AP