In July 2013, AIG and GE Capital were the first non-banks classed as systemic risks by the Financial Stability Oversight Council, which was formed after the 2008 financial crisis and is made up of the heads of the US regulatory agencies. The designation comes with Fed oversight and tougher regulatory standards.

The scrutiny of AIG and GE Capital, which are overseen by the Federal Reserve, is a preview of what other non-banks may face if they are also designated as systemic risks to the financial system.

Financial companies that could be in the FSOC’s sights wondered how the Fed would regulate non-banks, and some assumed the agency would view them differently than the biggest banks it already oversees. The treatment of AIG and GE Capital shows they are being regarded in the same manner as JPMorgan, Citigroup and Bank of America, according to people familiar with the process.

• Life insurer MetLife is waiting to see if it will be designated this year, while its smaller rival
• Prudential Financial was deemed a systemic risk last September.
• LARGEST ASSET MANAGERS: On July 31, FSOC decided for now to lift the threat of systemic risk designations for the largest asset managers, but said it would focus on the industry’s products and activities.
• PRIVATE EQUITY & HEDGE FUNDS: The review of asset managers came after an FSOC-commissioned report on the industry, which also said it was reviewing private equity and hedge funds, prompting predictions that those sectors could be next on the council’s agenda.

Those companies can look to the experience of AIG, which received a $182bn government bailout amid the crisis, and GE Capital, which faced liquidity scares in 2008, to see what is in store for them. A handful of Fed officials now work at the companies alongside AIG and GE Capital employees, just as they do at the banks.

“AIG believes in strong regulatory oversight,” the company said. “AIG works closely with various regulators, including the Federal Reserve, and we believe that oversight of large financial firms, coupled with the state regulation to which insurers are already subject, can further strengthen the safety and security of the financial system and people’s confidence in it.”

Fed officials are also involving themselves in the kinds of decisions that company management or board directors usually make, including

• whether employees should be fired or disciplined, which has been surprising, according to some people familiar with the process.
• “The Fed is being very intrusive,” said one of these people. “It’s been much more intense than people expected.”
• Another person familiar with the process said the Fed did not make employment decisions, but it did assess operations of non-banks in a variety of ways, such as whether the company had an adequate audit department. Those reviews, which focus largely on risk management, internal controls and governance, could be interpreted as indirect suggestions to discipline or fire an employee, the person said.

“The Fed serves a critical role in ensuring the stability and soundness of the financial system,” GE Capital said. “We have great respect for their expertise and counsel. And working closely with them, we have strengthened the safety and resiliency of our business.”

The non-bank companies designated as systemic risk fall under “enhanced prudential standards”, which also apply to the largest banks, such as JPMorgan, so it should be expected that they are treated in a similar manner, the person added.

The pressure on AIG and GE Capital will only intensify when the companies have to participate in the Fed’s

1. stress test and
2. capital planning process,

... which have tripped up the largest banks, most recently Citi. The results will determine whether the companies can increase dividends or share buybacks.

There is still uncertainty surrounding one of the biggest concerns non-banks designated as systemic risks have – what capital standards the Fed will use in its oversight.

The Fed has insisted that the Dodd-Frank financial reform bill forced it to apply bank capital standards to non-banks.

In response, the Senate recently passed a bill that would give the Fed the room to apply capital standards that are tailored for the insurance industry, while House lawmakers have urged FSOC designations to be put on hold until the capital standards are resolved.