The Federal Reserve just came out with a request for public comment on the regulation of General Electric Capital Corp (GECC) as a Sifi, “Application of Enhanced Prudential Standards and Reporting Requirements to General Electric Capital Corporation”. It is interesting to see why the Fed thinks they should be regulated as a bank and what that could mean.
Dodd-Frank (Section 113 and 165) allows the Financial Stability Oversight Council (FSOC) to designate that nonbanks be subject to supervision by the Federal Reserve “…in order to prevent or mitigate risks to U.S. financial stability that could arise from the material financial distress or failure, or ongoing activities of, these companies…” In July 2013 GECC and AIG were deemed systemically important. The FSOC explained their rationale in the publication, “Basis of the Financial Stability Oversight Council’s Final Determination Regarding General Electric Capital Corporation, Inc.” Last July 1st, GECC submitted a resolution plan (a/k/a living will).
“…In light of the substantial similarity of GECC’s activities and risk profile to that of a similarly-sized bank holding company, the Board is proposing to apply enhanced prudential standards to GECC that are similar to those that apply to large bank holding companies, including:
- Capital requirements;
- Capital-planning and stress-testing requirements;
- Liquidity requirements; and
- Risk-management and risk-committee requirements…”
“…additional independence requirements for GECC’s board of directors, restrictions on intercompany transactions between GECC and General Electric Company, and leverage capital 1requirements that are comparable to the standards that apply to the largest, most systemic banking organizations. In addition, the Board is proposing to require GECC to file certain reports with the Board that are similar to the reports required of bank holding companies…”
GECC, it turns out, looks like a big bank. They had $514 billion in assets (as of Sept. 30, 2014).
“…Approximately 82 percent of GECC’s net income in 2013 was derived from its commercial and consumer lending businesses…” mostly from loans and leases to middle market companies, European mortgages, auto loans, debt consolidation, private mortgage insurance, and credit cards (they are the largest provider of private label credit cards in the US). GECC funds themselves with commercial paper, long term debt issues, and securitizations. GECC holds a large portfolio of investment securities and consumer loans. They are also active in derivatives. GECC owns Synchrony Bank, a federal savings association with $46 billion in total assets as well as GE Capital Bank with $20 billion of total assets (both as of September 30, 2014).
The Federal Reserve looks at 10 factors to determine is a nonbank quacks more like a bank. Included are:
- Off-balance sheet exposures
- Interconnectedness with significant financial counterparties
- The nature, scope, size, scale and mix of activities
- Degree of regulation, and
“… like many of the largest bank holding companies, GECC’s activities focus primarily on lending and leasing to commercial companies and on consumer financing and deposit products. Moreover, similar to many large bank holding companies, GECC borrows in the wholesale funding markets by issuing commercial paper and long-term debt to wholesale counterparties, and makes significant use of derivatives to hedge interest rate risk, foreign exchange risk, and other financial risks. GECC also holds a large portfolio of on-balance sheet financial assets, such as investment securities and commercial and consumer loans, which is comparable to those of the largest bank holding companies…”
The regulations that GECC will come under will largely mimic those of large bank holding companies, although there will be some exceptions. For example while “…GECC would meet the relevant asset threshold for application of the advanced approaches rule, the Board is not proposing to require GECC to calculate its capital ratios using the advanced approaches rule…” and “…the Board is not proposing to categorize GECC as a G-SIB or a D-SIB, or proposing to automatically subject GECC to all of the same standards that apply to the largest, most systemic U.S. banking organizations…” GECC will, however, be subject to eSLR.
Starting in 2017, GECC will have to comply with stress testing (applicable to bank holding companies with $50 billion or more of consolidated assets) and, as of 2016, CCAR.
We were especially interested if GECC was going to be subject to liquidity rules (LCR and NSFR). The final LCR rules did not include designated nonbanks. But the Federal Reserve appears ready to impose rules similar to Reg YY, which “…would thoroughly assess the business model, capital structure, and risk profile of the designated company to determine how the LCR standard should apply, and if appropriate, would tailor application of the standards by order or regulation to that nonbank financial company or to a category of nonbank financial companies…” Reg YY is a more hands on approach to liquidity management. It includes liquidity buffers that mimic LCR. It also requires bank boards to:
“…approve an acceptable level of liquidity risk that the bank holding company may assume in connection with its operating strategies (liquidity risk tolerance), receive and review information from senior management regarding the company’s compliance with the established liquidity risk tolerance, and approve and periodically review liquidity risk-management strategies, policies, and procedures established by senior Management. Regulation YY requires senior management of a covered bank holding company to establish and implement liquidity risk-management strategies, policies, and procedures, approved by the company’s board of directors; review and approve new products and business lines; and evaluate liquidity costs, benefits and risks related to new business lines and products. In addition, Regulation YY requires a covered bank holding company to establish and maintain procedures for monitoring collateral, legal entity, and intraday liquidity risks, and requires an independent review of a covered bank holding company’s liquidity risk-management processes and its liquidity stress-testing processes and assumptions…”
YY requires banks to do detailed monthly cash flow projections, create a contingent liquidity funding plan, perform monthly liquidity stress tests, and maintain an appropriate HQLA buffer.
It looks like GECC will have their hands full for a while.