Ian Katz New York
GENERAL Electric’s (GE) 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 will free the company from strict capital requirements and reduce government monitoring.
As part of a broad restructuring announced on Friday, GE general counsel Brackett Denniston said the finance unit would apply to lose its systemically important label sometime next year.
GE has already discussed its overhaul, which includes the sale of $26 billion (R311bn) of real estate, with US regulators who will decide whether it can go free.
Compelling
“We think we’ve come a long way and you can argue we’re not systemic right now,” Denniston said. “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 companies that regulators believe could threaten the US economy if they failed.
Companies have sought to avoid the capital, liquidity and leverage constraints that can come with being selected, with insurer Metlife suing the US government to try to escape.
Instead of fighting, Connecticut-based GE is slimming down. The company’s shares gained as much as 11.47 percent in New York trading on Friday, before closing 10.8 percent up at $28.51.
It was the biggest daily increase since March 2009, according to data.
Decisions on which companies are systemically important are made by the Financial Stability Oversight Council (FSOC), 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 scrutinise it the same way it does large banks like Citigroup and JPMorgan Chase.
To get out, GE Capital will have to convince the FSOC that its collapse will not hurt the broader financial system.
Once the restructuring was complete, GE’s ending net investment in GE Capital – a balance sheet gauge that excludes non-interest bearing liabilities and cash – would fall to $90bn from $363bn, the company said.
Just $40bn of that would be in the US, making it “inconceivable” that the company could be considered systemic, Denniston said.
GE’s overhaul “could well warrant de-designation”, said Karen Shaw Petrou, the managing partner of Washington-based research firm Federal Financial Analytics.
The FSOC reviews at least once a year whether companies should retain their status as systemically important financial institutions.
The council, decided in July to maintain GE Capital’s status.
This year it passed rules clarifying how companies were selected after lawmakers and the financial industry complained that the process was not 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
”. – Bloomberg