WASHINGTON -- The U.S. government on Monday preliminarily designated at least three financial companies as having the potential to pose a grave threat to the financial system, the first time regulators have used post-financial crisis authority to crack down on companies that have previously escaped federal attention.
AIG, the bailed-out insurance giant; Prudential Financial, the life insurer and asset manager; and GE Capital, the $530 billion lender responsible for a bulk of GE’s profit in recent years, all confirmed that the panel of regulators known as the Financial Stability Oversight Council has proposed to tag them as being so-called systemically important financial institutions, or SIFIs.
The designation, if finalized, may not amount to much in the short term, analysts and officials have said, because the rules detailing heightened oversight and limits on activities that the selection entails are unfinished. But over time, the SIFI tag is likely to constrain the companies’ abilities to take excessive risk or otherwise engage in activities that may threaten the health of the nation’s financial system.
The Federal Reserve would be responsible for policing the companies. The Fed and the Federal Deposit Insurance Corp. would be charged with forcing the companies to develop detailed plans -- called living wills -- that spell out how the companies would be wound down under the bankruptcy code should they near insolvency.
Authorities “took another important step forward by exercising one of its principal authorities to protect taxpayers, reduce risk in the financial system, and promote financial stability,” said Jack Lew, treasury secretary. Regulators did not identify the companies or indicate the number that were selected.
The companies now have 30 days to decide whether to contest the designation, and an additional 30 days to challenge the label in a hearing. After that, regulators have 60 days to come to a final determination.
Officials said the designations represent an evolution in how authorities oversee the financial system. Instead of simply focusing on banks, for example, officials are now focusing on activities that businesses engage in. This should enable regulators to spot the buildup of risk in various pockets of the economic system that eluded them prior to the financial crisis.
Rep. Jeb Hensarling (R-Texas), House Financial Services Committee chairman, criticized regulators for designating some companies as “too big to fail,” signaling to market participants that these companies would never be allowed to fail due to their importance.
The SIFI designation is largely a response to the near-meltdowns of AIG and GE Capital during the financial crisis from 2007 to 2009. AIG required more than $180 billion in commitments from American taxpayers to protect it from insolvency after disastrous bets that homeowners wouldn’t default on their mortgages, while GE Capital heavily relied on government funding programs after losses raised questions over its viability.
Both financial crisis developments, during the late summer and early autumn of 2008, surprised regulators and policymakers, who vowed never to be caught off guard again.
The 2010 law overhauling financial regulation known as Dodd-Frank gave authorities the power to tag companies as systemic. But the panel charged with doing so, the Financial Stability Oversight Council, or FSOC, took roughly two years to get to this step. Treasury officials said they had hoped to name the companies last year.
Much of the council’s time involved whittling down the list of potential SIFI companies. Regulators also have been preparing for possible challenges to the designations.
All three preliminary designations were expected by analysts and market participants. The companies had said officials had been weighing slapping them with the systemic tag. Tim Geithner, former treasury secretary, had mentioned AIG and GE Capital as examples of the kinds of companies that one day would be known as SIFIs.
Prudential said it is considering contesting the designation. Russell Wilkerson, GE Capital spokesman, said the company received the notice from FSOC and was reviewing the details. AIG said simply that it had received the notice.
The restrictions that may be imposed on the companies include limits on their borrowings and dividends to shareholders. They also may have their pay schemes subject to government rules.
The Fed is weighing how to apply to insurers and other non-bank financial companies the standards it has proposed for banks.
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