General Electric formally asked to be released from supervision by the Federal Reserve on Thursday, saying it has sufficiently shrunk its once-massive financial services arm so it would no longer pose a systemic threat to the banking system.
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GE is the first of the four nonbank companies labeled "systemically important financial institutions," or SIFI, under the 2010 Dodd-Frank financial reform law to formally apply to regulators to lose that status after making significant changes to its business.
Being categorized as a SIFI required GE to submit to financial supervision by Fed staff and rein in leverage, two factors in GE's decision last year to exit most of its lending business, which until recently provided as much as half of the conglomerate's profits.
In a filing sent Thursday to the Financial Stability Oversight Council, GE said it had cut its total assets in the financing division by more than half, eliminated the majority of its U.S. operations, and cut the company's ties to the rest of the financial system that had led to its receiving the SIFI designation.
The remnants of GE Capital, the company's finance arm, are "smaller, simpler and less interconnected with the U.S. financial system," the company said, and the unit "does not pose any conceivable threat to U.S. financial stability."
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. GE has since signed agreements to sell lending businesses worth some $168 billion, out of a goal of roughly $200 billion. Of those, the company said this week, $138 billion worth of deals have been closed.
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.
On Wednesday, MetLife Inc. won a victory in its bid to shed its SIFI label when a federal judge overturned the government's determination that the insurance company poses a threat to the financial system. MetLife had been fighting the decision for more than a year.
Rather than fight the FSOC, 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, Wells Fargo & Co. and other buyers.
The company's North American commercial lending business was sold to Wells Fargo last fall, which at $30 billion in assets was one of the largest pieces that it had to shed. The completion of that sale, earlier this year, largely cleared the path for GE to apply to lose its SIFI designation.
It is still working to sell off smaller units, including a hotel lending unit that GE agreed to sell this week to a subsidiary of Western Alliance Bancorporation. The company is still looking to sell small pieces of its North American operations, including a business making loans for fast-food franchises, as well as other assets overseas.
The company says the breakup of the finance business will ultimately allow it to send roughly $35 billion in dividends from GE Capital to the corporate parent, if regulators approve.
GE Capital's total assets have declined from $549 billion at the end of 2012 to $265 billion today, the company said. Excluding cash and insurance assets that the company has been running off, GE has about $50 billion in finance assets remaining in the U.S., it said in the filing.
The company has also slashed its dependence on commercial paper, once a major funding source for the company's loans, from $43 billion outstanding at the end of 2012 to $5 billion now. GE says its commercial paper is less than one-tenth of 1% of the market.
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. Over all, the share of GE's profits from lending will drop substantially, however, from roughly half in the middle of the last decade, to less than 10% of total earnings by 2017, the company says.
The FSOC hasn't detailed exactly what criteria it will use when re-evaluating a designation, but has said generally that it will be looking for material changes at a firm.
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