Fed to Allow GE Capital Time to Complete Divestitures

By Ryan Tracy And Ted Mann 

        WASHINGTON--The Federal Reserve is set to give General Electric Co.'s finance unit a temporary reprieve from having to face the central bank's strictest regulations, a nod to how GE has already announced plans to dramatically shrink the business.
        The Fed's rule, set for approval at a public meeting Monday afternoon, will delay until 2018 the moment when GE Capital would have to start preparing for the Fed's annual "stress tests," maintain higher capital levels and add independent directors to its board, among other regulations. GE Capital will still have to comply with basic capital and liquidity rules starting Jan. 1, 2016, thresholds that the company has said it has already met.
        GE Capital is facing these rules because U.S. regulators in 2013 judged that its failure could cause distress across the broader U.S. economy. They designated it "systemically important," a label created under the 2010 Dodd-Frank law that brings stricter oversight to such firms from the Fed.
        GE Capital had asked the Fed to delay the rules given its April 10 announcement that it planned to sell off the bulk of its assets, which stood at about $500 billion at the start of 2015. GE said it plans to shed the very qualities that made the finance unit subject to heightened oversight in the first place, such as its reliance on potentially volatile forms of short-term funding, its 57 million U.S. consumer-lending accounts and its sprawling American commercial lending business.
        "It would not be sensible for us to disregard GE's announced plan to reduce [GE Capital's] size by about 70%, particularly in light of the fact that it is demonstrably executing that plan," Fed governor Daniel Tarullo said in a written statement prepared for Monday's meeting.
        He said the Fed's approach will ensure GE Capital "maintains important loss buffers for its continuing operations while it executes its divestiture strategy."
        The Fed's move sets up a test of whether GE can persuade U.S. officials that GE Capital, once shrunk, shouldn't eventually be subject to the tougher rules. A council that includes U.S. Treasury Secretary Jacob Lew, Fed Chairwoman Janet Yellen and other officials voted in 2013 to designate GE Capital as "systemically important" and bring it under the Fed's thumb. So far, no company has been able to shed that label.
        Mr. Tarullo said the outcome of GE's effort to reverse the regulatory designation is unclear. "It is possible that [GE Capital] will remain a designated institution for some time to come," he said.
        If GE remains under the designation after the selloff, it could revive some old disputes.
        For instance, GE's board of directors, as well as several large investors, objected to the proposal that would require GE Capital to add directors independent of the parent company. That requirement could undermine GE's oversight of the business, and ignores efforts made since the financial crisis to improve the company's risk management, GE directors wrote to the Fed early this year.
        In deciding whether to release GE Capital from the tougher rules, the council is likely to consider changes GE has executed, rather than those it is planning. The council has said it expects to focus on "material changes" at a company or the market in which it operates.
        GE Capital "has embarked on a transformation," CEO Keith Sherin wrote in a letter to the Fed on May 4. He said the changes would enable GE to petition for a release from "systemically important" status in 2016. The plan represents "a sea change" in GE Capital's situation and "its potential impact on and interconnectedness with the U.S. financial system," he wrote.
        By the end of 2017, GE expects to have sold off all but $95 billion in what the company called "steady-state assets." That calculation excludes cash and other "legacy assets." The asset value of GE's remaining financial operations would be about $140 billion, the company says, made up primarily of the three "industrial verticals" whose lending supports GE's industrial business lines. They are GE Capital Aviation Services, Energy Financial Services, and a healthcare-equipment leasing business.
        GE's remaining financial assets will be consolidated in two holding companies--one in the U.S. and one in London. Only $45 billion of the remaining assets will be in the U.S. Meanwhile, the parent company has guaranteed all of GE Capital's outstanding debt.
        The company and regulators have talked in recent months about the details of the Fed's proposal and GE's proposed remedies, according to people familiar with the matter.
        Write to Ryan Tracy at ryan.tracy@wsj.com and Ted Mann at ted.mann@wsj.com
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        (END) Dow Jones Newswires

        July 20, 2015 12:41 ET (16:41 GMT)

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