FDIC Vice-Chair Hoenig: "Separate Out Commercial Banks from Those Doing Broker-Dealer Trading Activities"
May 23, 2014 • 9:27AM

FDIC Vice-Chair Thomas Hoenig pointed to a number of problems which still threaten the soundness of the U.S. banking system in interview published in the May 20, 2014 CNN/Fortune magazine in an interview with Eleanor Bloxham, CEO of the Value Alliance.

Asked which of the risky behaviors at the biggest U.S. banks "scares you the most," Hoenig replied, "These institutions at the time of the crisis were highly leveraged. They were engaged in derivatives transactions and selling collaterized debt obligations (CDOs). The crisis occurred and they required government assistance ... [but] the notional value of derivatives is higher today than at the time of the crisis. Some changes have occurred, but banks have been resistant to reform in the area of collateralized loan obligations (CLOs) and been heavily involved in leveraged lending, which is risky." Some steps have been taken (raising leverage ratios from 3 to 5% for banks, requiring them to hold more capital, and the Volcker Rule restriction on banks' trading) "is not enough. I'm most concerned in Dodd-Frank with the Title 1 and Title 2 provisions. Title 1 primarily means ebanks would be resolvable under Chapter 11 bankrptcy. We still have a lot of work to do to make that happen. Title 2 relies on the government as a backstop. It's a form of bailout."

Hoenig said he "questions" the claim made by an Oliver Wyman study reported in the Financial Times that the biggest banks do not receive a subsidy in being allowed to pay a lower charge for "risk," Hoenig replied, "I question it.... On our website, we have numerous studies on 'too big to fail' subsidies. These studies come from academics, from the IMF, and the OECD, and they systematically show big banks do receive subsidies."

To the question of what legislators could be doing to protect the U.S. and other nations from another collapse, Hoenig replies: "I do think there is more than could be done. My colleague and I wrote a paper on it. If you could ... separate out commercial banks from those doing broker-dealer trading activities, I think that would add to safety and soundness. We need to reform the repo markets and reverse the 2005 bankruptcy act that allowed mismatched funding of low-quality, long-term assets with short-term liabilities. And we also need to reform money market [accounts]. They get treated like deposit [accounts] but they are investments. Regarding capital adequacy ... there is legislation pending for higher [capital] ratios. This is also something regulators can do if they choose to."