Tags: ge | general electric | federal reserve | too big to fail

GE Plan Opens Escape Path From Fed Too-Big-To-Fail Label

Friday, 10 April 2015 05:40 PM

General Electric Co.’s plan to exit most lending operations could make its finance arm the first entity to escape the grip of the Federal Reserve’s too-big-to-fail oversight, a move that would free the company from strict capital requirements and reduce government monitoring.

As part of a broad restructuring announced Friday, GE General Counsel Brackett Denniston said the finance unit will apply to lose its systemically important label sometime next year. GE has already discussed its overhaul, which includes the sale of $26 billion of real estate, with U.S. regulators who will decide whether the company can go free.

“We think we’ve come a long way and you can argue we’re not systemic right now,” Denniston said an in interview. “When the plan is further advanced, when we think the argument is even stronger and more compelling, that’s the right way to do it.”

GE Capital is one of four non-banks hit with the tighter scrutiny, which applies to firms that regulators believe could threaten the U.S. economy if they failed. Companies have sought to avoid the capital, liquidity and leverage constraints that can come with being selected, with insurer Metlife Inc. suing the U.S. government to try to escape.

Not Fighting

Instead of fighting, Fairfield, Connecticut-based GE is slimming down. The company’s shares rose $2.48 to $28.21, or 9.6 percent, at 2:41 p.m. in New York trading. It was the biggest daily increase since March 2009, according to Bloomberg data.

Decisions on which companies are systemically important are made by the Financial Stability Oversight Council, a group of regulators set up under the 2010 Dodd-Frank Act that Treasury Secretary Jacob J. Lew leads. A designation subjects a company to supervision by the Fed, allowing the central bank to scrutinize it the same way it does large banks like Citigroup Inc. and JPMorgan Chase & Co.

To get out, GE Capital will have to convince the FSOC that its collapse wouldn’t hurt the broader financial system.

Once the restructuring is complete, GE’s ending net investment in GE Capital -- a balance-sheet gauge that excludes non-interest bearing liabilities and cash -- will fall to $90 billion from $363 billion, the company said. Just $40 billion of that will be in the U.S., making it “inconceivable” that the company could be considered systemic, Denniston said.

GE’s overhaul “could well warrant de-designation,” said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc. “I would guess that it would.”

‘Significant Damage’

The FSOC reviews at least once a year whether companies should retain their status as systemically important financial institutions. The council, whose voting members also include the chairmen of the Fed, Securities and Exchange Commission and Federal Deposit Insurance Corp., decided in July 2014 to maintain GE Capital’s status. The council this year passed rules clarifying how companies are selected after lawmakers and the financial industry complained that the process wasn’t transparent enough.

When the regulators voted to designate GE Capital in July 2013, they said “material financial distress” at the firm could cause enough harm to the functioning of markets to “inflict significant damage to the broader economy.”

The council noted GE Capital’s operations in wholesale short-term funding markets linking the firm to other large financial institutions, and its role issuing commercial paper.

GE Capital’s issuance of commercial paper will fall to $5 billion by the end of 2015 from $43 billion when the FSOC designated the company almost two years ago, Denniston said.

The FSOC said then that GE Capital’s portfolio of balance sheet assets was comparable to those of the largest U.S. financial firms. Bank-holding companies with more than $50 billion in assets are automatically supervised by the Fed under Dodd-Frank.

The FSOC “welcomes the opportunity to consider any plans that, if implemented, address the potential risks to financial stability that resulted in a company’s designation,” the Treasury Department said in a statement Friday.

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General Electric Co.'s plan to exit most lending operations could make its finance arm the first entity to escape the grip of the Federal Reserve's too-big-to-fail oversight.
ge, general electric, federal reserve, too big to fail
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2015-40-10
Friday, 10 April 2015 05:40 PM
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