GE GE Aerospace

By Ryan Tracy and Ted Mann 

WASHINGTON -- U.S. regulators rescinded stricter oversight of General Electric Co.'s finance arm, GE Capital, after saying the company had made changes that significantly reduced its threat to U.S. financial stability.

The U.S. Financial Stability Oversight Council said it had voted this week to remove the company's "systemically important" tag. Treasury Secretary Jacob Lew said the change shows that designation is a "two-way process."

The head of GE Capital, Keith Sherin, said the decision is a result of the transformation of GE Capital into a "smaller, safer financial services company."

Since deciding to wind down its finance arm, GE Capital has signed agreements for the sale of about $180 billion of businesses and has closed about $156 billion of those transactions.

General Electric may now be able to add more debt to its balance sheet as Nelson Peltz's Trian Fund called for when the activist investor took a $2.5 billion stake in the conglomerate last year. Executives have been waiting to get out from under Fed oversight to explore such moves.

"We very may well decide to add additional leverage to the company, and we talked about something like $20 billion of potential capacity over time, which gives us a lot more flexibility around how we think about M&A as well," CFO Jeff Bornstein said last week.

The case marks the first time the Financial Stability Oversight Council has removed the "systemically important" tag since it was created under the 2010 Dodd-Frank financial overhaul law. GE had been seeking removal of the label, which it received in 2013 and comes with stricter oversight, for more than a year. The company has reduced the size of the finance business by more than half and cut reliance on volatile forms of short-term funding, among other concerns regulators had raised.

For the oversight council, the change is a significant response to critics who have said its process for tagging "systemic" firms is opaque and doesn't give firms a clear road map on how to reduce risk.

"The Council follows the facts: When it identifies a company that could threaten financial stability, it acts; when those risks change, the Council also acts," Mr. Lew said.

He said the council conducted a "methodological analysis" of GE Capital and determined it is "significantly smaller and safer, with more stable funding."

GE formally asked for the label to be removed in March, and met with the council staff during April and May, the Treasury Department said.

The decision comes as FSOC -- a committee made up of 10 regulatory agencies -- is caught in the middle of both legal and political battles challenging its authority.

On the legal front, FSOC is appealing a federal judge ruling nullifying its authority to impose the "systemically important" label on MetLife Inc. The stakes are seen as so high that the government case has drawn supporting briefs from an all-star cast of financial crisis-era policy makers, including former Federal Reserve Chairs Ben Bernanke and Paul Volcker, and former lawmakers Chris Dodd and Barney Frank, the co-authors of the 2010 Dodd-Frank Act that created FSOC.

Meantime, Republicans in Congress are moving legislation that would replace Dodd-Frank, including provisions that would scale back FSOC's authority to designate firms as SIFIs.

GE announced almost one year ago, in April 2015, that it would pivot away from financial services and sell off most of GE Capital, what was then its $500 billion lending business and one of the largest banking businesses in the U.S.

Chief Executive Jeff Immelt said changed market conditions and new regulations had caused GE Capital's returns to fall below its cost of capital. And investors had long urged Mr. Immelt to get out of the lending business, which nearly sunk the entire company during the financial crisis.

GE has narrowed its focus to high-tech industrial products like jet engines, power turbines, locomotives and medical scanners. That has meant jettisoning the lending businesses to buyers from the U.S. and elsewhere. GE unloaded more than $30 billion in real estate, including office buildings and hunks of debt, to Blackstone Group and Wells Fargo & Co. The company also sold its North American commercial lending business, which had about $30 blliion in assets, to Wells Fargo last fall.

GE will continue to operate its aircraft and jet engine financing operation, as well as a unit that invests in energy and power projects, and a smaller unit that provides health care-related financing. Overall, the share of GE's profits from lending will drop substantially, however, from about half in the middle of the last decade, to less than 10% of total earnings by 2017, the company says.

Wednesday's announcement leaves two nonbank firms with the systemically important label, as opposed to four just a few months ago. Huge insurers Prudential Financial Inc. and American International Group Inc. also received the label in 2013 are still considered systemically important, meaning they are overseen by the Fed and face stricter rules than their peers.

MetLife Inc. was designated in late 2014, but its court victory nullified that status, pending the government's appeal.

GE Capital's success at rescinding the label by appealing directly to the oversight council could lead Prudential or AIG to follow a similar path. The council is required to review the labels annually under Dodd-Frank.

Separately, some investors are pressuring some of the SIFIs -- both banks and non-banks -- to follow GE's strategy of shedding assets and shrinking to persuade they government they don't pose a threat to financial system.

Write to Ryan Tracy at ryan.tracy@wsj.com and Ted Mann at ted.mann@wsj.com

(END) Dow Jones Newswires

June 29, 2016 10:24 ET (14:24 GMT)

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