WASHINGTON The Financial Stability Oversight Council unanimously voted Tuesday to designate American International Group and GE Capital as systemically important financial institutions, the first nonbanks to be named to that category.
"The council has taken a decisive step to address threats to U.S. financial stability and create a safer and more resilient financial system," said Treasury Secretary Jacob Lew, chairman of the 10-member interagency council, in a press release. "These designations will help protect the financial system and broader economy from the types of risks that contributed to the financial crisis."
Both companies were notified in June they had been identified as risky by the council after being under consideration since September. AIG and GE Capital were given a 30-day window to object to the designation, but opted not to appeal. (Prudential Financial Inc., however, which is also on the list to be designated by the council, decided last week to appeal regulator's decision.)
AIG and GE Capital will now face a tougher set of supervisory standards and be required to prepare and file a plan with regulators detailing how to safely unwind the company if it's on the brink of failure. It's unclear exactly what additional capital and liquidity requirements those nonbank firms would face under the Fed's supervision.
In a statement, AIG confirmed that it was notified by the council of its final designation after the markets closed. The firm has previously said it "welcomes" the designation and "is already working and operating with the Federal Reserve as its regulator."
GE Capital spokesman Russell Wilkerson said the firm has been prepared for the SIFI decision. "We have strong capital and liquidity positions, and we are already supervised by the Fed. We are prepared to work with the Fed and FSOC on the implementation of this designation," said Wilkerson.
The council explained their rationale for designating both firms as systemically important in two separate memos.
In the case of AIG, the third largest insurance company in the U.S., the council said while the company's core insurance operations, like life insurance and annuity products, were intended as long-term liabilities, both have features that would make them vulnerable to "rapid and early withdrawals by policyholders."
"If the company's financial distress was sufficiently severe, funds from products allowing for early withdrawals might be withdrawn regardless of the size of associated surrender chargers or tax penalties," according to the memo. "A rapid liquidation of AIG's life insurance and annuity liabilities could strain AIG's liquidity resources and compel the company to liquidate a substantial portion of its large portfolio of relatively illiquid corporate and foreign bonds, as well as asset-backed securities."
Separately, the council determined that GE Capital, a savings and loan holding company and one of the largest holding companies with $539 billion of total assets, is a "significant participant in the global economy and financial markets and is interconnected with financial intermediaries through its financing activities."
Those activities include wholesale short-term funding markets. For example, the firm is a large issuer of commercial paper in the U.S. and is tied to a number of large global banks and nonbank financial companies through its long-term debt and back-up lines of credit. Additionally, money market mutual funds and asset managers are buyers of GE Capital's commercial paper.
"Material financial distress at GE Capital could trigger a run on MMFs more generally and lead to a broader withdrawal of investments from the CP market and other short-term funding markets," according to the council's memo. "Because MMFs and the short-term funding markets serve as important sources of funding for financial firms, a withdrawal of investment from those markets could impair the ability of financial and other firms to fund their operations."