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FSOC Removes "Too Big to Fail" Label on GE, Stock Up 2%

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Today, the Financial Stability Oversight Counsil (FSOC) approved GE’s (GE - Free Report) request to have its designation as a Systematically Important Financial Institution (SIFI) removed.  Members of the FSOC unanimously voted to remove the company’s identity as an institution which was “too big to fail” thanks to the company’s efforts in reducing the size of its financial unit, known as GE Capital.  Removal of the SIFI designation came just three months after GE made the request, and the company stated that the FSOC’s positive response came faster than it had expected it to.

What is a SIFI?

The SIFI label is given to firms who pose a potential threat to the US financial system.  Normally, these companies are large banks.  Nonetheless, there are a handful of non-bank corporations which are seen as being “too big to fail” by the US government because of the high level of financial services they engage in. 

SIFIs have to adhere to strict mandates which make them operate with less freedom.  These rules include meeting minimum capital and liquidity requirements.  SIFIs also have to be supervised by the Federal Reserve and adhere to following the standards within the Dodd Frank Act.

No company wants to be labeled as being “too big to fail” because of all the restrictive standards which must be met.  This arguably helps in limiting an individual firm’s own risk, but it may also conflict with what shareholders ultimately want: maximum profitability.  GE was designated as a SIFI since 2013, and the company has been working on meeting certain requirements so that it could shed its identity as being a potential threat to the broader financial system.

How GE Shook Off the “Too Big to Fail” Label

In April of 2015, GE announced that it would be aggressive in shrinking GE Capital so that it could operate more freely and go back to its roots as an industrial company.  Since then, the company has significantly reduced the size and risk profile of GE Capital.  GE Capital was heavily engaged in financial services on a very large scale, and this is why the FSOC designated GE as a SIFI.

Through shrinking, GE has signed agreements to sell $180 billion of businesses from GE Capital, and $156 billion of those deals have been closed.  The company intends to keep GE Capital businesses, which overlap with its industrial operations, so that the unit can bring more success to the company’s healthcare, energy, and manufacturing businesses.  GE has a goal to sell off a total of about $200 billion in assets, and it is getting closer to meeting this goal.  It should be noted that the GE Capital unit will be a part of the GE Store going forward.

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