Tags: Hoenig | Pawlenty | too big to fail | Dodd-Frank

Regulating Large Financial Institutions — Part I

By    |   Thursday, 05 June 2014 07:46 AM

As the program on banking regulation co-sponsored by the Boston University Center for Finance, Law & Policy and the U.S. Office of the Comptroller of the Currency slogged on, a panel consisting of Tom Hoenig, current vice chairman of the FDIC and former president of the Federal Reserve Bank of Kansas City, and Tim Pawlenty, former boy wonder governor of Minnesota and now CEO of the Financial Services Roundtable, took up the subject of the regulation of large banks. The panel was moderated by Kayla Tausche, one of the rising female stars at CNBC.

Hoenig, who is one of the leaders in the debate on the merits of breaking up the "too big to fail" banks, led off, and since he has spent his whole career studying issues of economic and regulatory policy, it's no wonder he had an advantage over Pawlenty, an earnest lawyer who is still learning the industry's talking points. Pawlenty led a charmed life in Minnesota politics, beginning as a county official, then serving in the legislature and finally managing to win two terms as state governor with 43 percent and 46 percent of the vote, respectively, because the opposition was divided. Later mentioned as a possible candidate for vice president, this writer saw the potential, particularly when former Rep. Virgil Goode, R-Va., attempted an independent presidential campaign, for a ticket of Goode and Pawlenty.

Hoenig set forth what he sees as the principles that should govern regulatory reform, starting with emphasis on what is good for the market as a whole, rather than for individual firms, and this principle incorporates allowance for the success or failure of institutions and for adherence to the rule of law, "not crony capitalism."

Unlike some of the other panelists on the program, Hoenig declared explicitly that the policy of too big to fail remains in place and continues to distort the market and its performance. He said it is still true that the largest banks cannot be allowed to fail, because this would bring down the financial system.

According to Hoenig, the largest bank, presumably JPMorgan Chase, by itself accounts for 25 percent of the nation's GDP when one includes off-balance sheet items, and the eight largest too big to fail financial institutions account for the entire GDP of the United States. These banks rely disproportionately on the federal safety net, rather than on capital, to instill confidence in investors, and he quoted former Citigroup CEO John Reed, who was in attendance, as observing that the complexity of these institutions is "just overwhelming."

Hoenig called for a change of course in regulating these too big to fail institutions, and again he warned that the policy embodied in Dodd-Frank of supposedly resolving large failing banks through bankruptcy is "not viable without government support."

Pawlenty was defensive from the outset of his remarks, referring to the "so-called phenomenon of too big to fail," the subliminal message being that the industry is still in denial on this point. However, he did admit that the financial crisis involved financial firms of all types and sizes. He insisted that after four years, "the paint is still not dry" on Dodd-Frank. Pawlenty expressed a view similar to Frank's in saying that Dodd-Frank prohibits more bank bailouts, while lamenting that despite what the law clearly says, some people don't believe it.

(Archived video can be found here.)

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As the program on banking regulation sponsored by Boston University Law School slogged on, Tom Hoenig, vice chairman of the FDIC, and Tim Pawlenty, former governor of Minnesota and now CEO of the Financial Services Roundtable, took up the subject of the regulation of large banks.
Hoenig, Pawlenty, too big to fail, Dodd-Frank
Thursday, 05 June 2014 07:46 AM
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