The Vice Chairman of the Federal Deposit Insurance Corp. just unveiled a proposal to regulate banks in a way he feels will be superior to current Dodd-Frank financial reform.
Speaking at the Institute of International Bankers Annual Washington Conference, Thomas Hoenig said that while Dodd-Frank is well intended, the regulations are too burdensome for all banks, “especially smaller banks.”
To remedy those issues, Hoenig presented an alternative.
“Today I will outline an alternative approach to better address the challenge of too-big-to-fail, regulatory burden, and competitive equity,” he said to the conference.
The proposal will partition nontraditional bank activities into separately managed and capitalized affiliates. This will result in a return of the safety net — a common term describing the ways and means by which the Federal government ensure prudent bank operations.
From his speech:
The proposal also would require greater owner equity at risk for large, complex, universal banks, as defined in the accompanying term sheet. With these conditions in place, too-big-to-fail would be well on its way to being addressed, and a true opportunity for regulatory relief for these largest banks would be provided. We could pare back the thousands of pages of rules that inhibit bank performance and level the competitive playing field without undermining the stability of our financial system and economy.
Hoenig added that the safety net is now cast wider than ever, covering ever-larger portions of commercial bank operations. Therefore banks continue to enjoy a competitive advantage over nonbanks in some aspects of financial operations, namely investment banking.
He even offered some stats to back his claim: “Data show that for nonbank financial service providers, such as independent broker-dealers not affiliated with an insured bank, tangible equity measures 8% of assets, whereas many nonbanks that are affiliated with an insured bank operate with substantially less capital measuring about 5% of assets.”
Hoenig joins the chorus of voices, President Donald Trump among them, calling for rollbacks of Dodd-Frank regulation.
These reforms, he said “must be grounded in capitalism that permits failure and improves economic efficiency and growth while maintaining the safety and soundness of the economic and financial system overall.”
“We can best achieve these goals if the largest banks were to partition their commercial and investment banking activities and also hold tangible equity capital at a level where bank owners—not the taxpayer—cover the cost of inevitable failures,” he concluded.
To read Hoenig's speech in full, click here. And to read a breakdown of the FDIC plan, click here.
