Tags: Fed | Hoenig | Bank | Capital | Rules | Too | Weak

Fed's Hoenig: Bank Capital Rules Too Weak to Avert Crises

Tuesday, 12 Apr 2011 11:24 AM

Federal Reserve Bank of Kansas City President Thomas Hoenig said international capital rules are too low to prevent another U.S. banking crisis.

Standards set by the Basel Committee on Banking Supervision require “far too little capital,” Hoenig said today in a speech in Charlotte, North Carolina. “That will not prevent the next crisis and will not adequately prepare institutions for the next crisis.”

The rules drawn up by the Basel Committee and endorsed by the Group of 20 leaders last year will require lenders to more than triple the highest-quality capital they hold to cushion against losses by 2019.

The regulations may trim the return on equity of European banks, on average, by 4 percentage points, and U.S. banks by 3 percentage points, according to estimates by McKinsey & Co. consultants.

Large U.S. commercial banks should be broken up with their activities restricted to lower-risk businesses, said Hoenig, the U.S. central bank’s longest-serving policy maker.

“We really do need to think about redefining the scope of legitimate financial activities of the commercial banks,” Hoenig said, voicing a previously stated view. “That means to break them up, in essence.”

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