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Fed’s Hoenig: US Should Break up Big Financial Firms

Wednesday, 23 Feb 2011 02:06 PM

Federal Reserve Bank of Kansas City President Thomas Hoenig said U.S. regulators should avert another crisis by breaking up large financial institutions that pose a threat “to our capitalistic system.”

“I am convinced that the existence of too-big-to-fail financial institutions poses the greatest risk to the U.S. economy,” Hoenig said today in a speech in Washington. “They must be broken up. We must not allow organizations operating under the safety net to pursue high-risk activities and we cannot let large organizations put our financial system at risk.”

Hoenig, the lone dissenter from every Fed meeting in 2010, has argued that the most sweeping overhaul of U.S. financial regulation since the Great Depression won’t prevent the largest banks from taking excessive risks and increasing market share. Regulators, including the Fed, are implementing the law.

“In my view, it is even worse than before the crisis,” Hoenig said at a luncheon for Women in Housing and Finance. “As well-intentioned as the Dodd-Frank Act may be, it will not improve outcomes,” he said.

The Dodd-Frank Act, named after its chief sponsors Massachusetts Representative Barney Frank and former Connecticut Senator Chris Dodd, both Democrats, created a resolution authority to unwind the largest financial institutions. It also adopted the Volcker rule, which aims at reducing the odds that banks will make risky investments and put their federally insured deposits at risk.

‘Public Purse’

“Protected institutions must be limited in their risk activities because there is no end to their appetite for risk and no perceived end to the public purse that protects them,” Hoenig said.

The Financial Stability Oversight Council, established under the legislation, is working to flesh out the Volcker rule.

“We must expand the Volcker rule and carve out business lines that are not essential to the basic business of commercial banking or consistent with public safety nets and then require that these lines be spun off into separate firms,” Hoenig said.

The Kansas City Fed chief cited research from the regional bank indicating that large banks enjoyed savings of 1.6 percentage points on debt with a two-year maturity and over 3.6 percentage points for seven-year debt.

“In a competitive marketplace, where just a few basis points make a difference, these funding advantages are huge and represent a highly distorting influence within financial markets,” he said.

Economic Outlook

Hoenig didn’t discuss his views for monetary policy or his economic outlook in the speech.

Fed presidents rotate voting on monetary policy and Hoenig, 64, will not vote this year. He joined the Kansas City Fed in 1973 as an economist in banking supervision after earning his doctorate at Iowa State University. Hoenig became president of the Kansas City Fed in 1991.

“The substantial incentives that large organizations have to take on more risk, with the government expected to pick up the losses should they incur, unfailingly lead to undue risks throughout the balance sheet,” he said.

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Federal Reserve Bank of Kansas City President Thomas Hoenig said U.S. regulators should avert another crisis by breaking up large financial institutions that pose a threat to our capitalistic system. I am convinced that the existence of too-big-to-fail financial...
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2011-06-23
Wednesday, 23 Feb 2011 02:06 PM
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