General Electric Company (NYSE:GE)’s finance unit (General Electric Capital Corporation) will be required by the U.S. Federal Reserve to comply with a new, more stringent standards on capitalization, as per proposed plans announced by the Fed on Tuesday. The new standard to be imposed on General Electric Capital Corporation (GECC) is designed to ensure stability of a non-bank firm that is deemed important to the overall well being of the financial system.
In a press release dated November 25, The Federal Reserve indicated that General Electric Company (NYSE:GE)-General Electric Capital Corporation’s activities and risk profile holds substantial similarity with a banking institution of comparable size, prompting the regulatory agency to propose additional prudential standards for GECC under the supervision of the Fed’s Financial Stability Oversight Council.
The new set of rules will mitigate any threat that GECC, in light of its activities as a firm, might pose to the financial system. The Fed’s proposal, which is open for public comments within 60 days upon publication in the Federal Register, will regulate GECC the way it does a bank holding company, with specific rules that address its nature as General Electric Company (NYSE:GE)’s financial arm. The new regulations specifically adds capital ratios designed to have a buffering effect for possible losses in an event of a financial crisis.
Under the 2010 Dodd-Frank Wall Street reform act, banks holding an asset worth $50 billion are treated as “systemically important financial institutions”. However, it also provided that non bank institutions deemed by the Financial Stability Oversight Council as large enough to cause financial instability can be so regulated. Reuters cites GE Capital spokesman Seth Martin as saying that the company has been anticipating the new regulatory standards as provided for in the Dodd-Frank Act. The report further notes that General Electric Company (NYSE:GE) is looking towards reduced exposure to GECC, with a targeted decline of 25 percent in profit contribution as against 45 percent the previous year.
This article has been written by Nonito Guntan.