Friday, November 18, 2011

Thomas Hoenig Confirmation Hearing

The U.S. Senate Banking Committee held a hearing yesterday on the nomination of Thomas Hoenig for the position of vice chairman of the FDIC. Mr. Hoenig served as the president of the Federal Reserve bank of Kansas City until his retirement in September. In the hearing Mr. Hoenig stressed his 38 years in the Federal Reserve banking system has provided him with the experience in banking supervision and regulation necessary for the role. He noted his experience in dealing with financial crises through the financial panics in Asia, South America, Russia, and Mexico, as well as, the most recent financial crisis.

In the Q&A period following his testimony, Mr. Hoenig gave some insight into his views on industry consolidation and “too big to fail.” The questions and responses are as follows:

Senator Shelby: What do you believe are the principal causes of consolidation in the banking sector?

Thomas Hoenig: Well Senator, there are probably several. One of those would be just the economies of scale and the technology brought forward. I think another thing has been, and this is one thing I am sensitive to for community banks, the fact that when you do introduce new regulation, whatever the right reasons and so forth, it does put a kind of a fixed cost over the banks. They require more dollars to spread those costs over and that has encouraged consolidation. So I think one of the challenges that the regulatory authorities have is to inform community banks, all banks, but community banks in particular in terms of how these regulations can be put in place. Get them at least pointed in the right direction so that they can control some of those costs and can compete on a cost structure basis across the broad economy, and that’s essential as we go forward.

Senator Corker: I’ve had some calls from some of the larger institutions that know that you’re going to be doing what you’re going to be doing, and obviously you’ve made a lot of comments in the past about the fact that any organization that is "too big to fail," is too big, and some of them are concerned. I think it’s an interesting dynamic personally and I thank you for bringing many of these thoughts to the table, but a lot of them are concerned that maybe their funeral plans don’t quite meet your standard and you break them apart anyway. I’d like for you to expand, and by the way I’m not giving judgment on that, I’m just expressing something that has been expressed to me. I’d love for you to talk a little bit about what you think ought to happen to some of our larger institutions and secondly, will that affect how you look at the “funeral plans” that these have to produce and I think you have to approve. Is that correct?

Thomas Hoenig: Yes, and let me say, I’m not against big. I’ve said that several times. I am against "too big to fail;" because "too big to fail" does impact the taxpayer in significant ways. What my concern has been, and I voiced this, is that if you take the safety net and you place it underneath these institutions and give them and their creditors protection that they know or perceive strongly are in place, then they do increase the risk. They do increase the fragility. You can see, as an example, in leverage. The higher the safety net the more you tend to encourage leverage so you get a higher return on equity. Now, if you have strong capital but you compete from a position of strength, if you are highly leveraged you are vulnerable, so I think it is incumbent on these institutions to understand themselves their risk profile and how much risk they have. And it’s very important that the regulatory agencies and the Federal Deposit Insurance Corporation understand these institutions. And that if they present these living wills or what we choose to call them. They have to be understandable, and if the management and the directors can’t understand it, I don’t think we can understand it. So the burden is on them to show that they are manageable, that their risk will not impact the taxpayer in the future and that’s capitalism, and I think I would be supportive of that. But I don’t support future bailouts by the taxpayer for institutions that are allowed to take on too much risk.

Read the testimony.

Watch the hearing.

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