GE Looks to Check Out of ‘Hotel California’ of Added Federal Oversig...

General Electric Co.’s decision to drastically slim down its GE Capital finance unit poses the first real-world test of whether a “systemically important financial institution” can ever jettison that label.

The designation as a so-called “SIFI” brings with it tougher oversight by the Federal Reserve. GE Capital entered that orbit in 2013, when regulators made their first wave of designations following the 2010 Dodd-Frank law.

“This is an opportunity to put the theory of Dodd-Frank to the test. Can Dodd-Frank SIFI status go as a two way street?” said Aaron Klein, director of the Financial Regulatory Reform Initiative at the think tank Bipartisan Policy Center.

GE, which wants to lose the SIFI label, said it had discussed its plans already with regulators, and will work with regulators and staff of the Financial Stability Oversight Council to “take the actions necessary to de-designate GE Capital.” FSOC is a panel of top U.S. financial regulators that oversees the designation process and ultimately will decide GE Capital’s fate.

Company officials said on a conference call with investors that they plan to formally request FSOC rescind the designation sometime in 2016, at which point GE plans to have completed many of the planned sales. The firm would remain under Fed oversight until the council formally voted to revoke the SIFI label.

“We have a constructive relationship with our regulators and will continue to work with them as we go through this process,” GE chief executive Jeff Immelt said in a press release.

“The Council welcomes the opportunity to consider any plans that, if implemented, address the potential risks to financial stability that resulted in a company’s designation,” a Treasury spokeswoman said. Treasury Secretary Jacob Lew is chairman of FSOC. The spokeswoman said consideration of a firm’s SIFI status is made during the council’s annual review process, which focuses “on whether any material changes at the company or in its markets justify a rescission of the designation.”

GE Captial’s previous annual review took place last July.

The Dodd-Frank law created the process for designating non-bank firms as SIFIs to ensure that nonbanks that could pose a danger to the financial system don’t slip through the regulatory cracks, as some did in the 2008 crisis. While it didn’t spell out an exact exit path, the law did require an annual review for designated firms and an opportunity for the council to vote to remove the label from a firm that no longer poses a systemic threat.

So far four non-bank firms, including GE Capital, have been designated as a SIFI. The others are insurers American International Group Inc., Prudential Financial Inc. and MetLife Inc.

MetLife, the largest life insurer in the U.S., is suing the federal government over the label.

Some of the SIFI firms have privately griped that regulators haven’t provided them with a clear path on how to shed the designation, and lawmakers of both parties have publicly echoed those concerns.

“There was no intent to create a ‘Hotel California’ provision,” Sen. Mark Warner (D., Va.) told Treasury Secretary Jacob Lew during a Senate Banking hearing last month, referencing the Eagles song about being able to “check out any time you like, but you can never leave.”

Indeed, multiple senators indicated that they’d love to see designated firms taking steps so they’re no longer as systemically important – which suggests that FSOC could be under some pressure to embrace the steps GE is taking to whittle down GE Capital.

Mr. Lew sought to assure lawmakers that the council is open to rescinding the SIFI label through the annual review process if a firm made significant changes to the risks posed by their business model and activities. “Obviously, a firm would have to change the character of the risk it presents in order for that change to be made.”

His comments indicate that FSOC would have to see GE follow through on its plan to sell and spin off the bulk of GE Capital’s assets before considering rescinding the “systemically important” designation.