As the local arm of GE Capital faces potentially being drawn into the Reserve Bank's non-bank deposit taker (NBDT) regime, its parent in the United States has been designated "systemically important" and will have to hold more capital.
US regulators have voted to "designate" both General Electric Capital Corporation and American International Group (AIG) to address potential threats to financial stability. Their move comes under the Dodd-Frank Wall Street Reform and Consumer Protection Act where non-bank financial institutions can be subjected to consolidated supervision and increased prudential standards.
Designation by what's known as the Financial Stability Oversight Council subjects the two companies to supervision by the Board of Governors of the Federal Reserve System and to enhanced prudential standards. The Council, which is led by the US Treasury Department, decided that material financial distress at these companies – if it were to occur – could pose a threat to US financial stability. See the announcement here and a Wall Street Journal story on the move here.
AIG received a US$182 billion taxpayer funded bailout at the height of the global financial crisis, and GE Capital Corp had some US$139 billion of debt guaranteed by the US Government.
A spokeswoman for GE Capital Australia and New Zealand told interest.co.nz the greater US regulatory oversight would have no real impact on GE Capital's local operations.
"We have strong capital and liquidity positions, and we are already supervised by the Fed," the GE Capital spokeswoman said. "We are prepared to work with the Fed and Financial Stability Oversight Council on the implementation of this designation."
Last month Greg White, GE Capital's chief operating officer for Australia and New Zealand, told interest.co.nz the firm shouldn't be included in any extended Reserve Bank of New Zealand NBDT regime because it was already "very heavily" regulated.
The Reserve Bank is currently reviewing its NBDT regime. One of the issues under consideration is the very definition of a NBDT. The Reserve Bank is considering changing the definition to ensure it better catches entities likely to raise systemic risks in the NBDT sector, including through lending as well as borrowing.
With net lending assets of $2.4 billion, GE Capital is New Zealand's biggest finance company by assets ahead of ANZ's UDC with $2.1 billion.
A NBDT is currently defined as a person that offers debt securities to the New Zealand public, and carries on the business of borrowing and lending money, or providing financial services, or both.
However, the third of three proposed definitions of NBDTs listed in a recent Reserve Bank consultation paper is; "Defining NBDTs as entities that carry on the business of borrowing and lending, and/or providing financial services, with greater use of statutory carve outs." This option makes no specific mention of whether to be a NBDT an entity must take deposits from the public or not. GE Capital does not.
White noted GE Capital already faced regulation in New Zealand through the Fair Trading Act and the Credit Contracts and Consumer Finance, which are overseen by the Commerce Commission. And as a Qualifying Financial Entity it comes under the Financial Markets Authority's umbrella.
"We think as a responsible lending financial institution we are already very well regulated," White added.
1 Comments
this is fascinating. the regulators appear concerned not because of the resultant losses to the investing public - because there are none. But to the fianncial institutions that support GE, or the negative implications down stream to the market as a whole should GE withdraw funding support. As was the case here when GE "shut up shop" during the height of the recession. This leads on to the same arguement of "who is to big to fail?" and at what point should the rbnz step in and offer support> Furrthermore where do you draw the line? As to include some institutions but exclude others goes right to the heart of competition, and compliance issues, and therefore cost.
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