Federal Reserve Bank of Kansas City President Thomas Hoenig urged the US to ban proprietary trading at banks and overhaul regulation to ensure a competitive financial system.
“We will not have a healthy financial system now or in the future without making fundamental changes that reverse the wrong-headed incentives, change behavior and reinforce the structure of our financial system,” Hoenig said in a speech today at the US Chamber of Commerce in Washington.
Hoenig’s recommendations build on his proposals over the past year to let big US banks fail. The Senate Banking Committee on March 22 approved Chairman Christopher Dodd’s financial rules overhaul, which includes the proposed Volcker rule to ban proprietary trading and prohibit investment in and sponsorship of hedge funds and private equity funds by banks.
“A credible resolution process, simple rules for leverage and loan-to-value limits, and the Volcker rule reforms will allow all banks to compete on an equitable basis,” Hoenig said at a conference on financial markets, hosted by the business group. “Reinstating these fundamental principles will enhance consumer, business and Main Street access to that most essential resource — capital.”
Hoenig, 63, is the longest-serving Fed policy maker, having taken office in 1991. He is a voting member of the Fed’s Open Market Committee this year and has dissented from both of the panel’s decisions in January and March, preferring to jettison the pledge to keep interest rates very low for an “extended period.”
Specific outlook
Hoenig didn’t give a specific outlook for the economy or monetary policy. He said the “market is slowly correcting, and credit growth is or will begin flowing to Main Street, providing job growth and economic recovery. However, it will not be rapid or easy.”
Responding to audience questions, Hoenig said non- performing loans have continued to increase and would worsen during a slow economic recovery.
“Non-performing loans have continued to trend up,” Hoenig said. “That trend line is very much influenced by where the economy goes from here.”
He also reiterated his opposition to stripping the Fed of powers to supervise smaller banks, saying it would be “extremely harmful” to curtail the central bank’s oversight.
Other agencies
The Senate bill would move to other agencies the Fed’s supervision of all banks except those with assets of more than $50 billion, which means most of the regional Fed banks would supervise no firms or just a few. The Kansas City Fed district has no single bank holding company with more than $50 billion in assets.
Hoenig said he “couldn’t agree more” with people who say that if a financial firm is too big to fail, then it’s too big.
The top 20 US banks held Tier-I common equity equal to 5.1 per cent of their assets at the end of 2009, compared with 6.7 per cent for other banking firms, Hoenig said. That reflected implied support from the government and lets the firms issue more and cheaper debt, he said.
“This framework has failed to serve us well,” Hoenig said, citing losses during the financial crisis and rescues from the Troubled Asset Relief Program that resulted in an “immediate reduction in lending to Main Street.”
Last year, 45 per cent of banks with assets of less than $1 billion increased their business lending, Hoenig said.
