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June 4, 2013 7:32 pm
AIG, GE Capital and Prudential Financial have received an extensive document from US regulators, explaining why they are big and risky enough to damage the financial system.
Sent on Monday evening, the individual analyses of each group were accompanied by a note explaining that the companies would be subject to new requirements for capital, liquidity and stress testing from the Federal Reserve.
One person familiar with the work of the Financial Stability Oversight Council, which comprises the main US regulators, said the analysis focused on “transmission channels”.
“If a firm were to get into material financial distress what are the impacts of the distress on counterparties, on markets, on the services they provide in the financial system?”
Prudential said it was considering challenging the determination. AIG has previously said it can live with it. GE Capital has not said whether it might appeal. Both AIG and GE Capital have long been the posterchildren for the programme, which aims to impose on the riskiest “non-bank” financial groups similarly tough standards of capital, liquidity and supervision as are required of big banks.
Both got into distress during the financial crisis, with AIG requiring a $182bn bailout from the US government, and GE Capital, a unit of General Electric, tapping government debt guarantees as its access to credit dried up.
Prudential and other insurers, such as MetLife, have protested more vigorously, arguing in meetings with government officials and in some public comments that they are not as risky as Wall Street banks or the AIG of 2008 and do not warrant the same standards of oversight.
Other sectors appear to have been let off the hook, most notably large asset managers such as BlackRock. But regulators are continuing to examine the sector, weighing whether some of its largest companies deserve designation. The initial set of criteria excluded asset managers and others because it was “very balance sheet focused”, said the person familiar with the process. That might be altered.
Even after the council examines all possible companies and appeals are exhausted, there is not a fixed list. Companies can be added or removed every year. Uncertainty also governs what happens to the designated companies as rules have not been finalised. But the Fed has proposed minimum capital levels and a limit on credit with a single counterparty, part of an attempt to stop the domino effect of distress that was seen in 2008.
Also unclear is whether there will be any advantage to being designated. Robert Benmosche, chief executive of AIG, and some Republicans who oppose the programme, have suggested that the named companies might be able to borrow more cheaply because of a belief that increased government oversight equates to a government guarantee.
Mr Benmosche told the Financial Times last year: “There may be some value to being a Sifi some day – borrowing costs, perception, the strength of an organisation, how well regulated you are.” The Obama administration has tried to dispel that belief.
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