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.
GE spokesman Seth Martin said the company was "grateful" that
the Federal Reserve had taken its plans to exit GE Capital into
account in finalizing the proposed rules, and said the company was
in position to meet the standards that will apply beginning in
2016.
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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