The Financial Stability Oversight Council has designated American International Group and General Electric Capital as Systemically Important Financial Institutions (SIFIs).

In accordance with the Dodd-Frank Act, the Council is authorized to determine that a nonbank financial company's material financial distress—or the nature, scope, size, scale, concentration, interconnectedness, or mix of its activities—could pose a threat to U.S. financial stability.

These designated entities will be subjected to stricter prudential regulatory standards and supervision by the Board of Governors of the Federal Reserve. Those measures include conducting their operations in compliance with applicable risk-management standards and being subject to relevant examination and enforcement provisions.

For purposes of the Dodd-Frank Act, a company is “predominantly engaged in financial activities” if at least 85 percent of annual gross revenues are derived from, or consolidated assets are related to, “activities that are financial in nature,” as defined by the Bank Holding Company Act.

The designations, according to FSOC, are not intended to suggest that either company is currently experiencing material financial distress.

AIG's “size and interconnectedness, certain characteristics of its liabilities and products, the potential effects of a rapid liquidation of its assets, potential challenges with resolvability” were cited as factors that led to its designation.

“During the intensification of the financial crisis in the fall of 2008, AIG became the recipient of considerable government support, which was deemed necessary to avoid an even larger financial disruption,” FSOC wrote. “While the company's strategy, funding profile, and global footprint have changed greatly since the financial crisis, AIG remains a large and complex company with meaningful non-insurance related exposures.”

AIG is the third largest insurance company in the U.S.

A wholly owned subsidiary of General Electric, General Electric Capital (GECC) is a savings and loan holding company with $539 billion in total consolidated assets (as of Dec. 31, 2012). It is described in FSOC documents as “a significant source of credit to the U.S. economy.” Large global banks and large non-bank financial companies also have significant exposure to GECC.

“GECC holds a large portfolio of on-balance sheet assets comparable to those of the largest U.S. bank holding companies,” the FSOC determination says. If it had to rapidly liquidate assets, the impact could drive down asset prices and cause balance sheet losses for other large financial firms “on a scale similar to those that could be caused by asset sales by some of the largest U.S. bank holding companies.”

Prudential Financial, a third company under consideration for SIFI status, has challenged its designation. It has requested a hearing before the FSOC. The agency, by statute, has 30 days to comply with those requests and must make a final determination on a company's status within 60 days after the hearing.

The FSOC was established under the Dodd-Frank Act to identify risks to financial stability of the U.S. financial system through “comprehensive monitoring” of the nation's largest financial firms. Among the criteria it relies upon in evaluating whether an entity poses systemic risk: having at least $50 billion of total assets, $30 billion in outstanding credit default swaps, $3.5 billion in derivative liabilities, or $20 billion of debt. Firms with a leverage ratio of more than 15-to-1 in assets to equity, or a short-term debt to asset ratio of 10 percent, also warrant consideration. The Council also considers a company's size, interconnectedness, liquidity risk, and existing regulatory scrutiny.

SIFIs will be required to conduct regular stress tests, prepare credit exposure reports, and draft “living wills” that document resolution and liquidation plans. They may also face enhanced prudential standards, including requirements regarding risk-based capital and leverage, liquidity, risk management, early remediation, and credit concentration. Additional standards apply to capital, public disclosure, and short-term debt limit.