General Electric’s withdrawal from the financial-services business is being hailed in Washington as a victory over “shadow banking.” This is akin to celebrating the criminal-justice system when a prisoner hangs himself in his cell.
GE Capital was the quintessential “shadow bank”—a finance company that could compete with insured banks because it had fewer regulatory costs and a more nimble business model. As such it was a target of the Federal Reserve and the Financial Stability Oversight Council (FSOC), both of which sought to regulate it as a bank. Count GE Capital as their first scalp. Congress should make it the last.
In 2013 the FSOC designated GE Capital as a systemically important financial institution—a SIFI—which automatically subjected it to what the Dodd-Frank Act calls “stringent” regulation by the Federal Reserve. Although the Fed hasn’t yet proposed regulations for SIFI finance companies, GE’s management understood that the firm’s opportunities to innovate and compete would be deftly smothered over time.
This article was originally published in The Wall Street Journal. The full text will be published here on Monday, April 20.
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