The Financial Stability Oversight Council (FSOC) designated American International Group Inc (NYSE:AIG) and GE Capital ‘systemically important’ as they could pose risk to the U.S. economy if they were to falter.
The Financial Stability Oversight Council (FOSC) voted unanimously to designate the two non-bank financial firms to help protect the financial system and broader economy from the type of risks that contributed to the financial crisis.
American International Group Inc (NYSE:AIG) and GE Capital thus became the first non-bank financial firms to get the ‘systemically important financial institutions’ (SIFI) tag that would place the firms under increased oversight.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More
Earlier, the No. 2 U.S. life insurer Prudential Financial Inc (NYSE:PRU) in its 8-K filing contested FSOC move to designate it as systemically important.
Significance of SIFI Tag By FSOC
FSOC thus has used the powers under Dodd-Frank financial reform legislation for the first time to place non-bank financial institutions under enhanced oversight.
A company getting the SIFI tag would be required to conform to various requirements including risk-based capital, leverage liquidity, stress-testing, overall risk management, resolution plans, besides early remediation and credit concentration.
Rationale For Assigning The Tag
Treasury department’s FSOC feels a rapid liquidation of AIG’s insurance policies and annuities could “compel the company to liquidate a substantial portion of its large portfolio” of bonds and other assets, causing “disruptive effects on the broader financial markets and impair financial market functioning.”
The regulators feel GE Capital is now a significant source of credit to the U.S. economy.
Shift In Financial System Landscape
FSOC’s decision highlights the shift in financial system landscape. Several U.S. banks have complained that the new rules would mandate them to finance their operations.
On the contrary, banks have contested ‘shadow financial institutions’ are allowed to grow rapidly as they are not subjected to such higher scrutiny by the regulators. Thus, FSOC’s decision is to partially clip the growth of such shadow financial institutions by bringing them under enhanced oversight.
With more equity, besides forcing them to comply with tougher capital requirements, banks would be subjected to a leverage ratio that could force them to earn lower profits besides selling more assets, since a higher ratio could make U.S. banks less competitive following reduction in profit.