The sell-off of GE Capital has the potential to change the financial landscape on several levels.
How will this impact other SIFIs and TBTF? GE is fundamentally different from, say, JPM or Citibank. The industrial business that is the core of GE will go on. Does this raise the likelihood of other SIFIs shrinking by slicing off businesses? Bankers may not think so, but politicians and perhaps even regulators may line up to call GE Capital the poster child for responsible restructuring. A big complex bank that has consumer and investment banking could be nudged to jettison the riskier pieces (read: the investment bank). After all, wasn’t GE able to find buyers of their assets? But investment banking is harder to sell. Who is it said of service business: “every night the assets go down the elevator”? Even when there is an asset to sell, it is not easy. Being a first mover has an advantage. Being 3rd or 4th trying to sell a derivatives portfolio – not so much. Client relationships suffer.
But aren’t banks already shrinking those businesses that don’t meet the return on capital hurdle? Anyone in the securities finance business can attest to this already being the case. But is the process too slow for the regulator’s taste? And what methods will they use to speed it along? Will regulators hold stress tests, CCAR, and the other tools at their disposal over the banks in order to push their objectives along?
Was the move to shed GE Capital’s assets driven by the desire to reallocate capital to the industrial side, where returns were better (as GE chief Immelt said) or was it the result of the Fed asserting themselves (or both)? As an April 12th FT article “GE Capital succumbs to changing regulatory climate” (sorry…behind the pay wall) by Tom Braithwaite, Barney Jopson and Gina Chon, said,
“…People close to the matter said GE Capital had the most contentious relationship with regulators out of the four non-banks designated as SIFIs…”
GE Capital did not win any friends at the Fed by writing a 57 page complaint letter. In an environment where the Fed has become more forceful about what they want institutions to look like, GE Capital may have found themselves facing a Fed not afraid of aggressive pushback.
Will GE still be financing their client purchases of locomotives and jet engines? Will they be matching the loan term with their funding? Depending on short-term market-driven funding like CP got GE into a very difficult situation in the crisis. While their smaller scale will allow GE Capital to sidestep SIFI status, does that mean the problem has gone away? Is this the [insert appropriate regulator] problem now?
The FT article had a great quote:
“…Aaron Klein, a former Treasury official who is now a director at the Bipartisan Policy Center, asks: “Is financial risk like the law of thermodynamics? It can never be destroyed, it just moves around…”
If regulation simply moves risk around to places that are deep in the shadows, this is a bad result.