Regulators choose AIG, GE Capital for more oversight

• Financial Stability Oversight Council identified GE Capital%2C AIG as %22systemically important%22
• Designations will mean stricter oversight from financial regulators
• Financial analysts say designations could affect stock buybacks and dividend increases

Federal regulators said Tuesday they have unanimously agreed to subject insurance giant American International Group and GE Capital to tougher government scrutiny and financing requirements because they could pose a threat to the financial system in a crisis.

The Financial Stability Oversight Council gave final approval to the designations of the two non-bank financial companies as "systemically important"— the first such action taken under the 2010 Dodd-Frank financial reform act. It means the firms will be regulated by the Federal Reserve and will have to maintain larger capital reserves, among other requirements. The council said it voted Monday.

The oversight council, an interagency panel formed after the 2008 financial crisis and headed by Treasury Secretary Jacob Lew, tentatively identified the companies as systemically important in early June. A third company that received the preliminary designation, Prudential Financial, said last week it would appeal the decision.

"Today, the council has taken a decisive step to address threats to U.S. financial stability and create a safer and more resilient financial system," Lew said in a statement.

In a statement, AIG said that it "did not contest this designation and welcomes it."

GE Capital said: "We have been prepared for this ... decision. We have strong capital and liquidity positions, and we are already supervised by the Fed. We are prepared to work with the Fed and (the council) on the implementation of this designation."

Some financial analysts have said the designations could make it more difficult for companies to buy back shares and raise dividends.

During the financial crisis, the troubles of some non-bank firms threatened the U.S. financial system and the broader economy. AIG, for instance, nearly shut down because of the obligations it assumed from its sale of credit-default swaps, which provided insurance against the risk that certain mortgage-backed securities would default. The firm was rescued by a $182 billion federal bailout.

In a report explaining its ruling, the stability council said AIG's life insurance and retirement investment products have "features that could make them vulnerable to rapid and early withdrawals by policyholders."

Such withdrawals could force AIG to sell "a substantial portion" of its "large portfolio" of corporate and foreign bonds and asset-backed securities. That could disrupt broader financial markets, spread to other insurance providers and cause significant losses among numerous AIG customers and counterparties to its financial contracts, the council said.

The panel also cited AIG's position as the nation's top commercial insurance underwriter, noting that a shutdown of the unit "could be protracted and disorderly."

GE Capital, meanwhile, is a large provider of commercial paper, which is short-term debt used by corporations to fund daily operations and purchased by money-market funds. Financial troubles at the company could trigger a run on money market funds and a broader withdrawal of investments from the commercial paper market, the council said.

Like a big bank, the company is also a major holder of assets, such as loans, and financial troubles could force it to quickly sell the assets, driving down their prices and causing losses for other financial firms. Since it's a large provider of credit to middle-market companies, distress at GE Capital could hurt those borrowers during a weak economy or financial-industry troubles, the council said.