The Financial Stability Oversight Council (“FSOC”) has voted to rescind its determination that material financial distress at GE Capital Global Holdings, LLC, could pose a threat to U.S. financial stability and that GE Capital should be subject to supervision by the Board of Governors of the Federal Reserve System and enhanced prudential standards.
The FSOC said that it unanimously determined that GE Capital no longer meets the standards for a determination, with one member recused.
The FSOC designated GE Capital in July 2013 and explained to the company the potential risks that the FSOC had identified. The FSOC said that, since its determination, the company has executed significant divestitures, transformed its funding model, and implemented a corporate reorganization. As a result, according to the FSOC, the company is a much less significant participant in U.S. financial markets and the economy.
The FSOC said that it concluded that these and other changes at GE Capital since the FSOC's determination have significantly reduced the potential for GE Capital's material financial distress to threaten U.S. financial stability.
The decision “clearly demonstrates that the Council's designation of nonbank financial companies is a two-way process. The Council will remove a designation when that company no longer poses risks to U.S. financial stability,” said Treasury Secretary Jacob J. Lew. “The Council follows the facts: When it identifies a company that could threaten financial stability, it acts; when those risks change, the Council also acts.
“One of the key lessons from the financial crisis is that the distress of large, interconnected financial firms can threaten the entire system – making the Council's authority to designate nonbank financial companies for supervision and enhanced prudential standards so important.
“Since its creation, the Council has designated four nonbank financial companies that could threaten U.S. financial stability. In each case, the Council conducted a rigorous, data-driven analysis, engaged extensively with the company, and provided a detailed explanation of the Council's concerns to the company. The Council has also conducted numerous annual reviews of its designations.
“The Council's rescission of GE Capital's designation is the result of a methodical analysis of risks that is in keeping with the law and the lessons of the financial crisis. The Council designated GE Capital in 2013 after identifying a number of key concerns, including the company's reliance on short-term wholesale funding and its leading position in a number of funding markets. Since then, GE Capital has made fundamental strategic changes that have resulted in a company that is significantly smaller and safer, with more stable funding. After a rigorous review and engagement with the company over the last year, the Council determined that based on these changes, the designation is no longer warranted.”
The Dodd-Frank Act requires the FSOC to review each nonbank financial company determination at least annually and rescind a determination if the FSOC, by a vote of two-thirds of the voting members, including an affirmative vote by the chairperson, determines that the company no longer meets the statutory standards for a determination.
Beginning in early 2015, GE Capital began meeting periodically with staff of FSOC members and member agencies regarding strategic actions the company intended to take and the effect those actions could have in reducing the potential risks GE Capital could pose to financial stability. On March 18, 2016, the FSOC notified GE Capital that the FSOC was conducting its annual reevaluation of the determination regarding the company. The company was invited to meet with staff and to submit materials for consideration by the FSOC.
On March 31, 2016, GE Capital made a written submission to the FSOC requesting that it rescind its determination, and in April and May 2016, staff of FSOC members and member agencies met with the company and engaged in follow-up discussions. Staff of FSOC members and member agencies also consulted with several of the company's regulators: the Federal Reserve, the Federal Deposit Insurance Corporation, and the U.K. Prudential Regulation Authority.
On Tuesday, June 28, 2016, the FSOC voted to rescind its determination regarding GE Capital and provided the company with a detailed statement of the basis for the FSOC's decision. The FSOC said that the public explanation of the basis for its rescission of the determination is intended to provide the public with an understanding of its analysis while protecting sensitive, confidential information submitted by GE Capital and its regulators to the FSOC.
During its reevaluation of the determination regarding GE Capital, the FSOC said, it carefully considered a broad range of information available through public and regulatory sources, as well as information provided by the company. The FSOC said that its rescission of the determination was based on extensive quantitative and qualitative analyses of GE Capital, taking into account the company's businesses and activities.
Learn more: FSOC Decision.
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].