By Ryan Tracy
WASHINGTON--Regulators told three huge financial firms to do a
better job explaining how they would handle a bankruptcy without
harming the U.S. economy, signaling that the companies have work to
do to avoid regulatory sanctions in the future.
The firms-- General Electric Co.'s financing arm, American
International Group Inc. and Prudential Financial Inc.--have been
designated "systemically important." The label comes with a
requirement for the companies to draft credible "living will" plans
for their own demise that don't involve support from taxpayers.
The Federal Reserve and the Federal Deposit Insurance Corp. said
Tuesday the three firms need to make improvements to their plans
before they file new versions at the end of this year. Although the
regulators called for improvements, their tone was softer than the
one they struck with a set of the largest U.S. banks that went
through the "living will" process last year. Regulators at the time
raised doubts about the credibility of 11 big banks including J.P.
Morgan Chase & Co. and Citigroup, Inc. and directed them to
make significant revisions or face regulatory sanctions.
Under the 2010 Dodd-Frank law, the Fed and FDIC can force
systemically important firms without credible living wills to break
apart or maintain more loss-absorbing capital.
The regulators asked the three nonbank financial firms Tuesday
for more detailed information and analysis about how they would
overcome obstacles to orderly bankruptcy, such as ensuring that
offices around the globe would have funding during a crisis. They
gave each firm individual feedback and instructed them to describe
"the progress they are making, and the steps remaining," toward
making it easier to unwind the firm without taxpayer support.
They said their feedback was tailored to the specific business
model of the firms--a nod to fears that the two agencies, which
have historically regulated banks, would try to impose banklike
rules on insurance firms.
The Fed and FDIC also told the three firms to put more
information into the public versions of the "living wills."
AIG declined to comment, and a Prudential spokesman said the
company "will carefully consider" the regulators' feedback.
A spokesman for the GE unit, GE Capital Corp., said the firm
"will work to address" the issues regulators raised.
Jim Wigand, a former FDIC official who is managing director at
restructuring firm Millstein & Co., said Tuesday's move was
similar to guidance regulators gave big banks before the stinging
rebuke last August, in that it gives the three firms "additional
direction as to where improvements need to be made" without
explicitly threatening "additional actions to be taken by the
regulators."
GE Capital appeared to get a bit more leeway from the Fed and
FDIC. The regulators said their feedback to the firm acknowledged
its plans to sell off major pieces of the finance unit in an effort
to reduce its importance to the broader financial system.
Last week, the Fed gave GE Capital a temporary reprieve from
stricter capital and liquidity rules that apply to the largest
financial firms. GE Capital is planning to apply to remove the
"systemically important" label next year, arguing it has made
enough changes that it should no longer have to submit living wills
and meet stricter capital rules.
Write to Ryan Tracy at ryan.tracy@wsj.com