Credit: Shutterstock photoThe Federal Reserve devised a set of stringent regulations for the financing arm of General Electric Company ( GE ) - GE Capital. The proposal intends to regulate GE Capital as if it were a bank holding company, with added governance rules tailored in accordance with its unique structure and profile.
Need for Regulation
GE Capital is one of the non-bank firms that are believed to be critically important to the wellbeing of the financial system. While the 2010 Dodd-Frank Wall Street reform act defined "systemically important financial institutions" as those with more than $50 billion in assets, it also powered the Financial Stability Oversight Council to keep an eye on non-bank financial firms that are large and risky enough so as to pose a threat to the stability of the U.S. markets.
The Fed was obligated to enforce tougher capital, liquidity and other rules for GE Capital after a group of U.S. regulators designated the firm as "systemically important" last year.
Proposed Rules
The Fed's proposed regulations are essentially similar to those that apply to large banks. Per the rules, GE Capital would be subject to risk-based capital and leverage requirements and the Fed's annual "stress test." The rules will require significant modifications in the structure of GE Capital and will also power the Fed to disallow the company from dividend payments or share repurchases.
Other elements of the regulations that could prove to be a source of friction between the company and regulators are the increased independence of GE Capital's board from the parent company, as well as restrictions on inter-company transactions between both. GE might eventually be forced to reshuffle its board as necessitated under the new regime.
GE's Initiatives
A GE spokesperson assured investors that that the company has been "preparing for the enhanced regulatory standards". Much of the proposal was in line with expectations, including enhanced capital ratios that would behave as financial cushions to absorb losses in case of another crisis, and GE seems prepared to meet the stringent rules.
Moreover, since the great financial crisis of 2008 when losses at GE Capital threatened the financial wellbeing of the parent company, GE has constantly been attempting to downsize GE Capital. At its height, GE Capital accounted for just under half of the revenues. In the second quarter, GE Capital contributed about 43% of the company's profits. The company now aims to downsize its financial business so that it accounts for just 25% of its profits by 2016, with the remaining 75% coming from the industrial segment.
The conglomerate recently spun off its consumer-lending arm, Synchrony Financial ( SYF ), in an initial public offering, raising $2.88 billion as part of a planned, staged exit from the financial business.
Additionally, since 2008, GE Capital has strengthened its risk management and governance structure and also enhanced its capital and liquidity.
The Fed is also developing capital standards for the other two companies that are considered systemically important, American International Group, Inc. ( AIG ) and Prudential Financial, Inc. ( PRU ).
GE presently sports a Zacks Rank #3 (Hold).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
