Regulators on the Move: Dodd-Frank Makes Its Way to GE and AIG

Stock Market

Love it or hate it, the Dodd-Frank Wall Street Reform and Consumer Protection Act is real, and its effects are beginning to settle on the financial markets. The Financial Stability Oversight Council, an agency created and given powers by the Dodd-Frank Act, reported Tuesday that the first nonbank financial institutions have been designated as systemically important. American International Group Inc. (NYSE:AIG) and GE Capital (NYSE:GE) will now both be subjected to consolidated supervision and enhanced prudential standards.

“Today, 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 J. Lew, chairman of the council. “These designations will help protect the financial system and broader economy from the types of risks that contributed to the financial crisis. The Council will continue to review additional companies in the designations process, to address remaining threats to financial stability.”

The new designation subjects the companies to regulation by the Board of Governors of the Federal Reserve, which is not necessarily new. Both firms are already in some way supervised by the Fed and, after the Dodd-Frank act was passed in 2010, saw this move coming. GE Capital and AIG have made substantial efforts in the post-crisis era to streamline operations to stabilize their financial positions, and both are arguably better off now for the changes.

As the Treasury pointed out, the designation “does not constitute a determination that the company is currently experiencing material financial distress.” It simply indicates that they are sufficiently important to the financial system that they government is holding them to a higher standard than smaller participants.

The news is just the latest in a series of steps regulators have taken to advance the implementation of Dodd-Frank and similarly spirited financial reforms. On Tuesday, for example, the Office of the Comptroller of the Currency announced a proposal to double the leverage ratio for large U.S. financial institutions. The OCC — together with the Federal Deposit Insurace Corporation and the Federal Reserve Board — proposed that sufficiently large banking institutions increase their ratio of equity to debt from 3 to 5 percent. In addition to this, the organizations proposed that deposit-holding subsidiaries of large financial institutions add 6 percent to the supplementary leverage ratio requirement in order to be deemed “well-capitalized.”

Major banks that could be affected by this include JPMorgan (NYSE:JPM), Citigroup (NYSE:C), and Bank of America (NYSE:BAC).

These firms would need to meet this requirement in order to qualify for federal deposit insurance, and failure to meet the requirement would mean limitations on bonus payments and shareholder distributions.

In addition to the leverage proposal, the OCC announced final capital rules designed to reduce the burden of income regulation on smaller banks.

“With the new capital rule, the federal banking agencies are taking an important step to strengthen the banking system and protect it from future financial crises,” said Comptroller of the Currency Thomas J. Curry. “I’m pleased that the new capital rule not only improves the quantity and quality of capital, but does so in a way that minimizes the burden on community banks and federal savings associations.”

In line with its efforts to simplify things, the OCC published a two-page quick reference guide for community banks explaining the changes.

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