General Electric’s decision announced Friday to sell off the majority of the assets of its finance arms will set up a test of one of the critical features of the new financial regulatory regime meant to prevent financial firms from threatening to bring down the economy and requiring bailouts.
Although General Electric said that the move to slim down GE Capital was in part a business one, executives also said Friday that it was undertaken for regulatory reasons.
GE Capital is one of four firms designated by financial regulators as a “systemically important financial institution,” a label that under the new financial reform laws carries with it added oversight and regulation. The company’s executives determined that it would be advantageous to simplify and shrink the company rather than face those regulations.
The super-group of regulators responsible for the “systemically important” label is the Financial Stability Oversight Council, made up of all the top federal financial regulators and headed by Treasury Secretary Jack Lew.
A Treasury spokesperson said Friday that the “council 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 did not say whether GE Capital’s announced plans would be sufficient to remove the systemic label. Instead, that will be considered during an annual review, which will “focus on whether any material changes at the company or in its markets justify a rescission of the designation.”
Just how firms could obtain a removal of the “systemically important” label is a question for which the financial industry and members of Congress had been seeking a clearer answer in recent months.
There was a concern that the label had turned into a “Hotel California,” in the words of Sen. Mark Warner, D-Va., with firms unable to leave once they’d been designated systemic threats. That’s an outcome that firms wanted to avoid, given the additional regulatory burden the comes with the label.
But General Electric executives said Friday that recent clarifications by the council, including new guidance published in February, had convinced them to go ahead with the simplification of GE Capital in the hopes of shedding the label.
A financial services industry representative said that GE Capital’s move would “obviously be an interesting test case to determine if a firm really can reverse a designation by slimming down.”
As of last year, the firm had nearly $500 billion of assets, more than all but a handful of banks. General Electric announced Friday that it would sell off $27 billion in real estate holdings and all other lines of GE Capital’s business not related to General Electric’s operations over two years.
In effect, GE Capital is breaking itself up because of the new regulatory regime. It was first designated as systemically important in July 2013. The council’s power to subject nonbanks to stepped-up oversight and higher capital standards was part of the 2010 Dodd-Frank financial reform law, meant to prevent another financial crisis.
If it is successful in reversing the systemic label, it will have demonstrated that there is an “off-ramp” from the systemic designation, as Sen. Dean Heller, R-Nev., sought in a congressional hearing with Lew in March. That will please the industry.
But it will also represent a victory for critics of the financial industry, who have sought tighter regulations on banks and big financial firms not just to make them safer, but also to encourage them to break themselves up or avoid reaching a certain size in the first place.
General Electric’s decision is a sign that the regulatory burden on big financial firms have reached a critical size, said Paul Kupiec, a financial regulatory expert at the conservative American Enterprise Institute.
The news “is solid evidence that the regulatory pendulum has swung too far, and we are now significantly over-regulating our largest financial institutions,” Kupiec told the Washington Examiner.
Kupiec stated by email that “government regulations that impose this much cost on financial firms — enough cost to totally short-circuit a valuable [and] successful finance company franchise — cannot be a positive productive outcome for the economy at large.”
