By Victoria McGrane And Ryan Tracy
WASHINGTON--Lawmakers from both parties grilled Treasury
Secretary Jacob Lew on Wednesday over whether financial companies
singled out by federal regulators for tougher oversight can ever
escape the penalty box.
Several lawmakers raised concerns that firms designated as
systemically important financial institutions don't have clear
guidance from the Financial Stability Oversight Council on what
changes they should make to shed the label, which brings with it
tougher rules and Federal Reserve oversight.
"There was no intent to create a 'Hotel California' provision,"
Sen. Mark Warner (D., Va.) told Mr. Lew during a Senate Banking
hearing, referencing the Eagles song about being able to "check out
any time you like, but you can never leave."
Mr. Lew heads the oversight council, a group of U.S. financial
regulators created by the 2010 Dodd Frank law to help prevent a
repeat of the 2008 financial crisis. The FSOC has designated four
nonbank firms as being systemically important over concerns their
failure could damage the financial system. Those designated include
the finance unit of General Electric Co. and insurers Prudential
Financial Inc., American International Group Inc. and MetLife
Inc.
Mr. Lew said the council provides firms with plenty of detail on
the risks in their business models and activities that led to the
designation. The council provides each firm with an annual review
of its designation, during which FSOC could decide to remove the
label if a firm has made significant changes that remove those
risks, Mr. Lew said.
That review process is "serious and gives rise to the
possibility of removing a designation," Mr. Lew said. "Obviously, a
firm would have to change the character of the risk it presents in
order for that change to be made."
He suggested it is too early in FSOC's life cycle for lawmakers
or others to make judgments about whether the council is serious
about letting firms out of the designation. "The test will come
over time as firms think through what the supervisory process means
and make the business judgments as to whether or not they want to
change their business to have the annual review reach the
conclusion that they should be de-designated," he said. "It was
never meant to be a process that only could go one way."
Several lawmakers, including the Senate Banking Chairman Richard
Shelby (R., Ala.) and Sen. Elizabeth Warren (D., Mass.), indicated
they believe a key part of FSOC's process should be providing
incentives to firms to make changes so they're no longer considered
systemically important.
Mr. Shelby asked Mr. Lew if he would support adding language to
Dodd-Frank to provide a process under which a firm could work with
FSOC before a final designation to figure out how to lower risk
enough to escape the label. Mr. Lew said no.
The debate is crucial to those firms, including asset managers
and other large financial firms that might someday come into
regulators' cross hairs.
So far, only MetLife has publicly challenged the regulators'
decision, arguing in a January lawsuit that the council "denied
MetLife the opportunity to modify its activities to avoid
designation."
The other firms that have received the label haven't yet
aggressively pushed to have it removed, according to people
familiar with the matter.
But The Wall Street Journal reported earlier this month that GE
has undergone a change of heart about GE Capital, and that the
banking business' commercial lending arm, which at the end of last
year accounted for just under half of its $237 billion in loans
outstanding, could be next on the block. The company has made no
decision about whether or how to dispose of the business, and any
move could come in stages.
The company's move has been driven primarily by two factors. One
is the fact that the unit's returns are falling, in part because of
restrictions that have led it to hold on to more capital and reduce
the amount of profits it can share with the parent company.
And secondly, some GE investors remain hungry for a more
pronounced shift away from financial services and toward the
company's industrial businesses, which could finally lift the
company's share price out of recent doldrums.
One person familiar with the matter said that GE's recent
discussions about GE Capital haven't centered on its status of
systemic importance. The issue could become relevant in the future
if the company makes larger changes to the business, this person
said.
Ted Mann contributed to this article.
Write to Victoria McGrane at victoria.mcgrane@wsj.com and Ryan
Tracy at ryan.tracy@wsj.com
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