GE Capital no longer too big to fail, say feds. Are bank regulations working?
General Electric has significantly scaled down its powerful finance arm to avoid strict government regulations established in the aftermath of the 2008 financial meltdown.
GE Capital, the lending arm of conglomerate General Electric, was the first financial institution Wednesday to come off a federal list of American companies that are considered “too big to fail,” or so critical to the economy that their collapses could bring down the country’s financial system.
These firms, called “systemically important financial institutions,” or SIFIs, were marked as such under the 2010 Dodd-Frank Act. The law passed in the aftermath of the 2008 financial crisis – during which the government diverted at least $700 billion in taxpayer money to bail out banks – in order to prevent future crises of that magnitude. It forces financial giants to reduce their size, complexity and risk-taking, as The Wall Street Journal reports.
The SIFI label comes with strict government regulations, including higher capital and liquidity requirements than a non-SIFI. To shed the designation, GE Capital sold or spun-off pieces of its financial business to banking competitors such as Blackstone and Wells Fargo. GE is now focusing more on its primary business, which includes making aircraft engines, power generation and oil and gas production equipment, and other machinery.
“The company is a much less significant participant in U.S. financial markets and the economy,” reports the Financial Stability Oversight Council (FSOC), a group of regulators chaired by the US Department of the Treasury secretary which is responsible for regulating SIFIs, in Wednesday’s announcement.
“The Council concluded that these and other changes at GE Capital since the Council’s determination have significantly reduced the potential for GE Capital’s material financial distress to threaten U.S. financial stability,” says the FSOC.
Financial companies designated as systemically important are scrutinized more closely by the US Federal Reserve. GE Capital was labeled as a SIFI in 2013, along with two other non-bank financial firms that are still on the list: Prudential Financial Inc. and American International Group.
MetLife was another nonbank that was flagged as a SIFI in 2014, but the insurer fought the federal government over the designation in court this spring and won its removal.
Besides lending firms and insurers, other SIFIs that can threaten the US economy because of their size are large banks and US bank holding companies with more than $50 billion in assets, reports the Journal.
It also reports that the share of GE's profits from lending will fall from about half in the middle of the previous decade to less than 10 percent of total earnings by 2017. By the end of this year, reports CNN Money, GE will have unloaded about $200 billion of GE Capital business, the company estimates.
In the government’s brief explaining the basis for its decision to rescind GE’s too-big-to-fail label, it says that when the label was applied several years ago, GE Capital was one of the largest financial services companies in the country, ranked by assets. It was significant source of credit to the US economy, providing financing to more than 243,000 commercial customers, 201,000 small businesses through retail programs, and 57 million consumers.
“Since the Council’s determination, the company has executed significant divestitures, transformed its funding model, and implemented a corporate reorganization,” the FSOC reported in its brief.
GE grew its finance business in the 1990s and early 2000s, according to CNNMoney. By launching credit cards, mortgages and exotic loans, GE Capital became one of America's biggest financial firms during that time.