The Financial Stability Oversight Council (FSOC) has just determined to rescind the “systemically important” designation of GE Capital Global Holdings under Title I of the Dodd-Frank Act (DFA) in the wake of, among other things, the sale of many of the firm’s financial assets and the spinoff of its consumer financial services business. The FSOC is the interagency body created by the DFA to oversee the DFA’s systemic regulation scheme for large financial institutions and exercise the responsibility under DFA Section 113 to designate large nonbank financial institutions as systemically important. In turn, GE Capital is one of the firms that the FSOC previously designated as systemically important.
The immediate implications of this action are limited to GE Capital. More generally, however, the FSOC’s action provides clarity, and perhaps some comfort, for the financial services industry that the systemic designation process is reversible and not inevitably a one-way ticket to perpetual systemic regulation. The FSOC’s rescission determination was accompanied by a relatively detailed explanation of its reasoning, which adds helpful transparency to this regulatory process.
The FSOC’s action probably is of limited interest to systemically important banking firms, which are regulated as such without FSOC action if they meet or exceed the DFA quantitative $50 billion asset threshold for banks and bank holding companies to qualify as systemically important. In turn, the FSOC has limited authority to change those banking organization classifications, primarily through raising (or recommending to the Board of Governors of the Federal Reserve System that it raise) the $50 billion systemic regulation threshold. In the case of nonbank financial institutions, however, the FSOC’s authority in this regard is not subject to quantitative constraints. Presumably, the FSOC’s actions will encourage other systemic financial firms that are considering the same exit strategy (shall we call it “DFAexit”?) or may consider it in the future.