FDIC Vice Chairman Discusses Balance in Regulatory Reform

In a speech delivered to the Peterson Institute for International Economics on March 28, 2018, FDIC Vice Chairman Thomas Hoenig discussed his view of how to provide meaningful regulatory relief without undermining the goal of assuring sound banking.  He said his recommendations were founded on his confidence in markets and in their ability to deliver consistent economic growth.  He said this involves trade-offs – a number of costly administrative rules that create burden with little benefit can be removed or minimized, but only with the presence of strong capital and wise constraints on a bank’s reliance on the government safety net.

Vice Chairman Hoenig pointed out studies supporting the argument that stronger bank capital contributes to stronger, more sustainable economic growth through a business cycle.  He cautioned against eroding the post-crisis capital standards that he said had contributed to the strength of U.S. banks and the recovery of the U.S. economy.  He said that weakening these standards will undermine the long-term resilience of not only the banking system, but the broader economy as well.

Mr. Hoenig said he is concerned that U.S. banking agencies have joined the recent Basel Committee agreement that, according to some estimates, could remove as much as $145 billion of capital from the eight largest banking firms.  He said that, should U.S. banking agencies embrace the Basel standard, the reduction in private capital would necessarily be underwritten by the FDIC, the Federal Reserve, and then the U.S. taxpayer.

He said the second prudential standard that serves to mitigate mispriced risk in the financial system is the Volcker Rule.  However, he said the Volcker Rule can be greatly simplified.  He believes commercial banks should be free to enter into swaps and other derivatives to accommodate loan customers or hedge their own risks.  And they should be free to buy and sell government securities and manage their day-to-day liquidity needs.  To accommodate that need, he suggested that such activities be entitled to a presumption of compliance with zero additional reporting requirements, unless compelling evidence to the contrary is identified during the normal supervisory process.  With that, he believes the Volcker Rule should continue to apply to all banks that benefit from deposit insurance.

Vice Chairman Hoenig said the “living will’ process for Too-Big-to-Fail banks is cumbersome, political, and misleading.  The process is costly to both bank and regulator.  He believes that the imposition of these administrative rules and regulations that substitute for long-tested and more reliable prudential standards is a poor tradeoff.  He said we can do with far fewer rules if there is a clear expectation that private ownership and substantial private capital, not taxpayer funding, will minimize the likelihood of crisis and its effects should it occur.

Mr. Hoenig observed that community and regional banks are better positioned for regulatory relief than the largest firms.  He has suggested a list of rules that should be reviewed for elimination or simplification, including:  the Basel capital calculations and compliance, liquidity rules, and CCAR.  The list also includes rules already under legislative review, such as appraisal requirements, examination cycles, and consumer rules regarding the collection of HMDA data.

Vice Chairman Hoenig concluded by observing that a stronger banking industry relying on sufficient private capital to manage through the cycles of the economy will be a freer industry, where management can structure its balance sheet based on its strategic business model rather than government requirements that predefine capital, liquidity, and resolution needs.

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