The Financial Stability Oversight Council voted Tuesday to place GE Capital and American International Group under stricter supervision, the first substantial move to address the risks that large nonbank companies pose to the financial system.
The interagency panel of regulators has ushered in a new era of oversight for a broad swath of firms that play in the financial markets but have largely escaped federal supervision. Now life insurers, hedge funds and private equity firms could come under the purview of the Federal Reserve and face tougher rules to govern their businesses.
“These designations will help protect the financial system and broader economy from the types of risks that contributed to the financial crisis,” Treasury Secretary Jack Lew, who chairs the council, said in a statement.
Tuesday’s vote puts to rest a lengthy, multi-stage review process for GE Capital and AIG. The companies were notified in June of the council’s intentions and given a 30-day window to object to the designation. Unlike Prudential Financial, which was also named by the council, GE Capital and AIG decided not to fight the designation.
GE Capital said it was prepared for the designation. “We have strong capital and liquidity positions, and we are already supervised by the Fed,” spokesman Russell Wilkerson said in a statement Tuesday night.
AIG could not be immediately reached for comment.
Both companies will have to submit a plan to regulators on how to unwind their holdings in the event of collapse.
GE Capital and AIG will have to set aside more money to cushion against losses, but it’s unclear exactly how much because the Fed has yet to specify the capital requirements. Industry officials and others following the process anticipate that the central bank will tailor capital standards and other rules for each business.
On Tuesday, the council provided the first detailed explanation for each firm’s designation.
The panel said GE Capital, with some $539 billion in assets, stood out because it is “a significant source of credit to the U.S. economy, providing financing to both commercial and consumer customers.” Large global banks and other financial firms have tremendous exposure to the company through the purchase of its long-term debt and backup lines of credit, the panel said.
“If GE had to rapidly liquidate assets, the impact could drive down asset prices and cause balance sheet losses for other large financial firms,” the panel wrote in its memo. “The resulting capital losses across financial firms...could exacerbate the stresses on the financial system by forcing other firms to sell assets and draw on their credit lines to meet liquidity pressures.”
In the case of AIG, the nation’s third largest insurance company, regulators said the company could face the equivalent of a bank run if policyholders got spooked about its financial health and cashed out en masse.
“A rapid liquidation of AIG’s life insurance and annuity liabilities could strain AIG’s liquidity resources and compel the company to liquidate a substantial portion of its large portfolio,” the panel wrote. “This asset liquidation could have disruptive effects on the broader financial markets and impair financial market functioning.”
It has taken the federal government nearly three years since the passage of the Dodd-Frank financial reform law to determine which nonbank companies, if they fail, could threaten the integrity of the nation’s financial system.
The goal of the designations is to ensure that nonbank financial firms will not fall through the cracks of the regulatory system the way AIG did at the start of the financial crisis. Lawmakers called for tougher oversight of financial companies after the insurance giant received $182 billion in government aid to save it from collapse in 2008.