By Victoria McGrane and Ryan Tracy
WASHINGTON--The Federal Reserve's proposed rules for General
Electric Co.'s GE Capital unit indicate the Fed is willing to
tailor regulations for "systemically important" nonbank financial
firms.
Whether it has the power to do so remains an open question.
On Tuesday, the Fed released a 67-page proposal that essentially
seeks to regulate GE Capital as if it were a bank holding company.
The Fed, in its proposal, made the case it did so because GE
Capital so closely resembles a bank. It also tailored GE Capital's
rules in specific ways it said better matched the firm's unique
business model.
That should bolster the confidence of the other "systemically
important" firms still waiting on rules from the Fed insurers
American International Group Inc. and Prudential Financial Inc.
They, along with other insurers, have said imposing banklike rules
on their firms will hurt their business and argue they shouldn't be
treated like banks since their liability structure is
different.
The Fed is required by the 2010 Dodd-Frank law to impose rules
requiring "systemically important" firms meet liquidity standards,
risk-management requirements and submit an annual "living will"
detailing its dismantling without taxpayer assistance. The Fed also
must impose tough capital and leverage rules on these firms, unless
it determines such measures "are not appropriate."
Top Fed officials have said they would like to tailor capital
rules for insurers but have repeatedly warned they can't do so to
the extent they want without legislation that gives them more
flexibility. The fate of that legislation is in limbo at the
moment, raising the threat that insurers may have to live with
stricter rules than they'd like.
The Senate has passed a bill giving the Fed the flexibility the
central bank says it needs. The House has passed one too, but the
House version also includes a handful of other changes to the
Dodd-Frank law, which means the Senate would have to pass that
broader bill for it to go to the president's desk.
So far, the Senate has balked at taking up the House package.
House Republicans have previously offered the insurance industry
assurances if the Senate doesn't act, the House will act on the
Senate's version on the bill, according to lobbyists and others
familiar with the matter. But President Barack Obama's recent
executive order on immigration has muddied the political waters on
Capitol Hill, raising additional uncertainty over whether the House
will move as quickly as insurance companies would like.
GE Capital and the insurers are being pulled deeper into the
Fed's orbit because of the 2010 Dodd-Frank law, which requires U.S.
financial regulators to identify nonbank firms whose failure could
damage the broader economy. Those firms are drawn in for Fed
oversight, including being required to meet stiffer capital,
liquidity and other rules, which the law leaves to the Fed to
write. A third insurer, MetLife Inc., is expected to be designated
as "systemically important" soon.
"In considering the application of enhanced prudential standards
to nonbank financial companies supervised by the Board, the Board
intends to thoroughly assess the business model, capital structure,
risk profile, and systemic footprint of a designated company to
determine how the enhanced prudential standards would apply," the
Fed wrote in its proposal, which is now open to public comment for
60 days.
"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."
Jaret Seiberg, an analyst with Guggenheim Securities, says that
emphasis on tailoring the rules to specific firms and the "great
lengths" to which the Fed went justifying the banklike rules for GE
Capital are encouraging for the insurance companies.
"We don't see how the Federal Reserve could make a similar case
for insurers given how different they are from banks," Mr. Seiberg
said in a note to clients Wednesday. "To us, this suggests a
similarly tailored approach for the SIFI insurers--AIG, MetLife,
and Prudential--especially if Congress clarifies that the Federal
Reserve can defer to state capital regimes for insurers."
A provision of the 2010 Dodd-Frank financial overhaul sets a
floor on minimum capital requirements the Fed can set for bank. The
Fed says that provision applies to insurance firms too, raising the
prospect that the insurance firms will have to meet the same
minimum standards banks must meet.
Write to Victoria McGrane at victoria.mcgrane@wsj.com and Ryan
Tracy at ryan.tracy@wsj.com
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