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Shrink or suffer

31 March 2016 By Richard Beales

GE Capital is ready to escape the regulatory yoke. The finance unit of $300 billion conglomerate General Electric on Thursday asked the U.S. Financial Stability Oversight Council to rescind is designation as a non-bank systemically important financial institution. It’s one of several signs that burdens like additional capital requirements imposed on so-called SIFIs are having the effects lawmakers wanted.

The timing is convenient, with insurer MetLife putting FSOC on the back foot by winning the removal of its SIFI designation in court just a day earlier. But it looks coincidental. GE Capital said on March 1 it was targeting the end of the quarter to file for the removal of its systemic tag.

GE has intentionally reduced its finance business to a shadow of its crisis-era former self. Among other moves, it has sold off assets to reduce the total by more than half to $265 billion, exited consumer finance and high-risk corporate lending, and cut commercial paper outstanding by nearly 90 percent. It has achieved much of that in the past 12 months. There aren’t specific thresholds that define when a non-bank like GE Capital ceases to be a SIFI, but the unit has demonstrably made itself less of a danger to the system.

MetLife took a different approach, contesting its designation. But even the $50 billion insurer, with $878 billion of assets at the end of 2015, in January initiated a breakup. Though the motivation to see it through may now be lessened, the company touted business logic as well as regulatory reasons for its split, and vigilant shareholders are keeping rivals like AIG on their toes.

Even America’s biggest banks – those deemed globally systemic and needing the biggest extra capital buffers – have trimmed their balance sheets. JPMorgan, for instance, ended 2015 with total assets of $2.4 trillion, down 9 percent from a year earlier, allowing it to reduce by a full percentage point the capital ratio it needs to maintain.

Forcing huge, interconnected financial firms to get smaller, less risky, or both was the basic idea behind the SIFI provisions in the post-crisis Dodd-Frank reforms. Ensuring that no company is too big to fail is still a work in progress. And it’s too soon to say the levels and balance of incentives are right. But if some large financial firms are shrinking or splitting and others reducing risk, something is working more or less as intended.

 

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