Kansas City Federal Reserve Bank President Thomas Hoenig warned on Monday that landmark financial reforms may not end market perceptions that taxpayers will rescue the largest banks and cautioned against speculative investments in housing.
Hoenig, testifying at a field hearing of the U.S. House of Representatives Subcommittee on Oversight and Investigations, said larger banks perceived as "too big to fail" have a lower cost of capital, putting smaller banks at a competitive disadvantage and threatening their business model.
The Dodd-Frank Wall Street Reform and Consumer Protection Act intended to end Wall Street bailouts by giving regulators a mechanism to seize and shut down failing large institutions in much the same manner as the Federal Deposit Insurance Corp. can shut down smaller banks.
Hoenig said it was not yet clear whether the reform act would put big and small banks on an equal footing.
"That can only happen if markets are absolutely convinced that too big to fail has finally been ended and only time will tell. It's an open question," he told the hearing in suburban Kansas City.
HOUSING SPECULATION "A MISTAKE"
Hoenig, the Fed's lone policy dissenter in recent months, did not address the U.S. central bank's outlook on the economy nor monetary policy matters. He voted against the Fed's decision earlier this month to reinvest funds from maturing mortgage-backed securities into Treasury debt to help push down mortgage interest rates further, citing a gradual improvement in the economy.
He also told the House panel that housing was not suitable for speculative investments by consumers.
"If the American people are looking for the housing market to be their investment opportunity, I think they're making a mistake," Hoenig said. "I don't think the economics of the housing industry ... is really designed for that. Right now the facts are we have an excess supply."
Hoenig said community banks had been tested by the "abnormally slow recovery" that the U.S. economy has experienced over the past two years and continues to face difficulties. "Commercial real estate, particularly land development loans, will be a drag on earnings for some quarters yet," he added.
Community banks are generally considered those with less than $10 billion in assets, which account for all but about 83 of the 6,700 banks in the United States, he said. All but three of the 1,100 banks based in the Kansas City Fed district are community banks.
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