GE Capital Shrinks to Avoid the Cost of Being “Systemically Important”


GE has been working on this for a while, and today they got their wish:

The U.S. Financial Stability Oversight Council said Wednesday that it voted this week to remove its label on GE Capital as “systemically important financial institution,” which carries more stringent oversight. Treasury Secretary Jacob Lew, who chairs the council, said the change shows that designation is a “two-way process”—a rebuttal to critics who have said its process for branding “systemic” firms is opaque and doesn’t give firms a clear road map on how to reduce risk.

This is good news:

GE Chief Executive Jeff Immelt said changed market conditions and new regulations had caused GE Capital’s returns to fall below its cost of capital….Since deciding to wind down the 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.

In other words, new regulations made it more expensive to do business as a huge financial services firm, so they decided to shrink. This is exactly the way it should be. Higher capital requirements and other rules give financial firms a choice: either accept the more stringent rules as a way of making themselves safer, or else shrink enough that they don’t pose a systemic danger in the first place.

Most banks are paying the higher costs, and that’s fine. As long as the additional capital requirements are sufficient, they’re now safer and less likely to collapse during a financial crisis. GE Capital chose the other route, and that’s fine too. So far, this is all working out pretty well.