Well that was quick… Metlife won a big ruling regarding its SIFI designation as we reported yesterday, and General Electric (GE Capital sold its asset management division to State Street yesterday- a process which could help in this matter) is also appealing any SIFI designation this morning. Will Prudential be next? Did the Metlife decision open a Pandora’s box? Only the future will tell, but it is hard to imagine AIG will get the status lifted even though it too is just an insurer.
Indeed, UBS stated in a report following the Metlife ruling:
The most direct read-across from this decision is on PRU (and AIG), which has also been designated a non-bank SIFI, though obviously the implications would hinge on the rationale for the ruling (which is currently sealed, but could be released ahead). We note that, unlike MET, much of our concerns for PRU (Neutral) involve the potential impact of this regulation. Further, we wonder if today’s ruling could embolden the industry’s current opposition / pushback to the pending DOL fiduciary standards rules.
Additionally, Morgan Stanley notes:
We would expect others in the industry such as Prudential to take advantage of this decision and explore alternatives to avoid their own designation. One key difference, however, is that Prudential no longer has the right to contest their designation in the courts as the timeframe to file a complaint has now passed. While Prudential has not discussed the other avenues open to them to potentially avoid the designation, the decision nonetheless makes it more likely that they too could avoid designation at some point in the future.
Generally, most analyst reports focused on implications for MET and PRU and less on AIG and GE.
Below are the main points from the the General Electric press release this morning:
General Electric (NYSE:GE) continues to quickly and successfully execute the transformation of GE Capital into a smaller, more focused financial services firm. Today, GE filed its request to the Financial Stability Oversight Council (FSOC) for rescission of GE Capital’s designation as a nonbank Systemically Important Financial Institution (SIFI).
The filing demonstrates that GE Capital has substantially reduced its risk profile and is significantly less interconnected to the financial system, and therefore does not pose any conceivable threat to U.S. financial stability. The request details the changes and dispositions GE Capital has made since being designated as a SIFI in 2013 and, in particular, since GE announced in April 2015 that it would become a more focused digital industrial company by dramatically reducing the size of GE Capital.
“Our submission details the complete transformation of General Electric Capital. Our plan to change our business model, shrink the Company and reduce our risk profile has been successful,” said GE Capital Chairman and CEO Keith Sherin. “We have completed over 80% of our projected asset reductions; exited leveraged lending and U.S. consumer lending; exited nearly all middle market lending; reduced real estate debt by more than 75% and real estate equity by 100%; and reduced outstanding commercial paper almost 90%.”
“We believe General Electric Capital no longer meets the criteria to be designated as a SIFI and we look forward to working cooperatively and constructively with the FSOC through the rescission process,” added Sherin.
The key points in the application are as follows and are detailed further in the attached summary: (Beginning numbers are as of year-end 2012; ending numbers are as of the time of filing.)
- GE Capital has completely transformed itself, primarily through the sale or split-off of most of its legacy financial services businesses, into a smaller, simpler company focused on customers and markets aligned with GE’s industrial businesses.
- GE Capital has reduced its assets 52%, from $549 billion to $265 billion. Of the remaining $265 billion in assets:
- $77 billion are cash and cash-like investments
- $36 billion are assets related to run-off U.S. insurance activities
- $153 billion are therefore non-cash, non-insurance related assets;
only ~$50 billion of these assets are in the U.S.
- Financing receivables are down 74%, from $277 billion to $72 billion.
Loans secured by real estate are down 77%, from $72 billion to $17 billion; in the U.S., this is down to $5 billion. - Loans to consumers are down 95%, from $72 billion to $4 billion; in the U.S., loans to consumers are down to $0.
- Meanwhile, cash and cash-like investments are up 35%, from $57 billion to $77 billion.
- GE Capital has reduced its assets 52%, from $549 billion to $265 billion. Of the remaining $265 billion in assets:
- GE Capital has materially reduced its use of short-term and securitization funding.
- Commercial paper (CP) is down 88%, from $43 billion outstanding to $5 billion, taking it from being the top issuer of U.S. CP to representing less than one-tenth of 1% of the market.
- Securitization funding is down 90%, from $30 billion to $3 billion.
- GE Capital does not plan to issue any incremental debt for the next four years. General Electric also assumed or guaranteed all of GE Capital’s unsecured debt, which mitigates the likelihood of and reduces the impact if GE Capital were to experience financial distress.
- GE Capital has exited one of its U.S. bank charters through the completed split-off of Synchrony Financial and regulatory approval has been granted for the sale of its U.S. deposit business to Goldman Sachs. The sale and the surrender of that second bank charter should be completed by April 30, 2016, after which GE Capital will no longer own any banks with deposits insured by the Federal Deposit Insurance Corporation.
- Through numerous dispositions and the Synchrony Financial split-off, General Electric Capital has exited all leveraged lending, all consumer lending in the U.S., most consumer lending in the E.U., and nearly all middle market lending and commercial real estate financing globally. Its current (and future remaining) businesses do not provide a critical function to the economy that could not easily be supported by other entities.
- GE Capital has simplified and rationalized its structure and completed a significant reorganization. These changes have reduced its complexity and enhanced its resolvability.
- GE Capital’s regulated operations are now centered in Europe. GE Capital has consolidated its non-U.S. operations into GE Capital International Holdings Limited, whose operations are and will be prudentially supervised by the U.K. Prudential Regulation Authority for as long as prudential regulation is required.
- Going forward, GE Capital will be focused on its vertical businesses which serve customers and markets aligned to GE’s industrial businesses: GE Capital Aviation Services, GE Energy Financial Services and GE Capital Industrial Finance, which includes Healthcare Equipment Finance and Working Capital Solutions. The go-forward portfolio composition and risk structure will be similar to that of other finance companies aligned with their industrial parents.
In sum, General Electric Capital believes it poses no threat to U.S. financial stability and, as of today, no longer meets the criteria for designation as a nonbank SIFI. GE Capital looks forward to working cooperatively with the FSOC on the request to rescind the SIFI designation.
See more from General Electric here
