FDIC Vice Chairman Hoenig Offers Proposal to Address Too Big to Fail and Glass-Steagall Issues

In a speech delivered on March 13, 2017, FDIC Vice Chairman Thomas Hoenig offered a new policy proposal that would allow the largest U.S. banks to separate their core banking and investment activities in exchange for significant regulatory relief. Vice Chairman Hoenig said his proposal would not reduce the ability of a universal bank to conduct any of its current portfolio of activities, whatever they might be. He said it would, however, partition nontraditional bank activities into separately managed and capitalized affiliates “to return the safety net back to its original scope and purpose.” Hoenig said his proposal would also require greater owner equity at risk for large, complex, universal banks.

Under Vice Chairman Hoenig’s proposal, large banks would have the option of separating their commercial banking functions and their nontraditional activities into two separately capitalized intermediate holding companies. Unlike the prohibition formerly existing under the Glass-Steagall Act, both entities could still be owned by the same holding company.

Vice Chairman Hoenig’s proposal calls for large banks to organize their traditional banking activities, such as deposits and commercial banking, in intermediate holding companies separate from their nontraditional activities, such as investment banking. Each entity would be subject to independent capital and liquidity requirements, and would maintain separate boards of directors. He said the parent holding company would be limited in its ability to offer debt funding to the nontraditional holding company.

In separating their entities, banks would be allowed exemption from numerous regulatory requirements, including stress tests and the new liquidity requirements. Vice Chairman Hoenig said the ultimate purpose of the proposal is to reduce taxpayers’ potential risks to large bank problems by separating the insured banking organization from the riskier activities that banks have engaged in since Gramm-Leach-Bliley was passé in 1999.

Vice Chairman Hoenig’s complete speech can be found here:  https://www.fdic.gov/news/news/speeches/spmar1317.html

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