Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., said that while his agency can handle the wind-down of one big failing bank at a time, a larger crisis could lead to talk of bailouts.
Hoenig said the authority given to U.S. banking regulators in the Dodd-Frank Act to dismantle a large bank may be effective only in an “idiosyncratic” situation and not a wider breakdown. In the latter case, lawmakers may be pressured to weigh a bailout like the Troubled Asset Relief Program of the 2008 credit crisis, he said at a House Financial Services Committee hearing Wednesday.
“If you have a systematic meltdown, as we did last time, I feel pretty confident that the Congress will be asked for another TARP,” he said.
While regulators work to figure out how they would use the law to wind down failing banks, he said “we have institutions that are every bit as vulnerable as they were before.” Big banks are “woefully undercapitalized,” and he contends they should be forced to set aside larger buffers, such as a 10 percent tangible capital ratio.
In statistics he submitted to the committee, bank leverage ratios, as calculated under Europe’s International Financial Reporting Standards, are frequently below 4 percent -- and even lower among some of the largest non-U.S. banks. Deutsche Bank AG is at 1.63 percent and Zurich-based UBS AG at 2.52 percent, his numbers show. Morgan Stanley is the lowest among the largest U.S. banks, at 2.55 percent.
Hoenig, a former Federal Reserve Bank of Kansas City president, said at the hearing that Dodd-Frank didn’t pull the government safety net from banks’ investment arms, which could have made the institutions easier to handle in a crisis by causing them to wall off their investment units.
Two Federal Reserve district bank presidents, Richmond’s Jeffrey Lacker and Richard Fisher of Dallas, said they believe Dodd-Frank didn’t end the perception that some banks are too big to fail.
“I don’t think we have prevented taxpayer bailouts by Dodd-Frank,” Fisher told lawmakers.
Lacker said the law failed to end the too-big-to-fail perception because it gives a “tremendous amount of discretion” to regulators in deciding how to take down banks, leaving government officials too vulnerable to lobbying and outside influence. He said he thought overhauling the bankruptcy code may be “worthy of consideration” if it can help a big bank go bankrupt rather than relying on FDIC resolution.
The law gave the FDIC the power to dismantle a bank if bankruptcy would be too risky. Former FDIC Chairman Sheila Bair, who also testified today, said the agency has come up with “a viable, operational strategy so the shareholder and creditors will take the losses” instead of taxpayers.
Dodd-Frank also called for banks to write so-called living wills to plan their own demise in the bankruptcy courts. It requires the plans be “credible” and to show how the banks can go bankrupt without threatening the financial system -- “a very tough standard,” according to Bair.
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