Acknowledging he will soon be leaving his agency post, Federal Deposit Insurance Corp. (FDIC) Vice Chairman Thomas M. Hoenig on Wednesday promoted the continuation of strong prudential standards for banks – including strong capital requirements – along with relief from onerous administrative rules during his keynote message Wednesday before the Peterson Institute for International Economics in Washington, D.C.
Hoenig’s term officially ends at the end of this month; Jelena McWilliams, nominee to become FDIC Board Chairman, will take the seat now held by the FDIC vice chairman.
During his speech, “Finding the Right Balance,” Hoenig noted the U.S. banking industry’s current strength, with near-record profits and stronger capital than the banking industries of most other industrial nations. He acknowledged the industry’s desire for fewer regulatory constraints, but he also urged against regulatory decisions that could open the door to a decline in banks’ capital strength – a situation he warned could leave the industry less able to weather a future downturn.
Hoenig discussed a number of capital and regulatory measures under consideration, as follows:
Capital: Hoenig said he cautions “strongly against eroding the post-crisis capital standards that have contributed to the strength of U.S. banks and the long-awaited recovery of the U.S. economy. Weakening these standards will undermine the long-term resilience of not only the banking system, but the broader economy as well.”
The FDIC official said reducing the capital requirements of the most systemically important banks by excluding central bank reserves from the supplemental leverage ratio (SLR) “is a serious policy mistake.” This would, he said, excuse custody banks from holding as much capital per assets as all other banks despite their importance to the financial system and capital markets. He also urged against removing initial margin from the exposure calculation of the SLR, which he said would ultimately shift the burden of a bank’s guarantee of clients’ exposures onto the public; and warned that U.S. regulators’ adoption of the new Basel accord, by some estimates, “could remove as much as $145 billion of capital from the eight largest banking firms.”
Volcker Rule: Hoenig said the Volcker rule limits the use of deposit insurance to fund speculative trading and related activities – something “that should not be compromised for any group of banks” – but he said its application could be simplified. “Commercial banks should be free to enter into swaps and other derivatives to accommodate loan customers or hedge their own risks. And they should be free to buy and sell government securities and manage their day-to-day liquidity needs,” he stated. “To accommodate this need, I suggest such activities be entitled to a presumption of compliance with zero additional reporting requirements, unless compelling evidence to the contrary is identified during the normal supervisory process.”
He added, “For the largest banks that engage in market making and trading, there should be the additional requirement that their CEOs attest in their confidence that procedures are in place and tested to assure compliance.”
Living wills: Hoenig called the current living will process “cumbersome, political, and misleading.” He suggested eliminating or extending the reporting cycle (which is currently annual), which would reduce bank and regulatory costs but leave “access to information no less available.”
Regulatory relief for regional and community banks: Hoenig’s other suggestions for relief, he said, have included elimination or simplification of the Basel capital calculations and compliance, liquidity rules, and Comprehensive Capital Analysis and Review (CCAR); and rules now under legislative review, including appraisal requirements, examination cycles, and rules on the collection of data under the Home Mortgage Disclosure Act (HMDA).
Speech by FDIC Vice Chairman Hoenig: “Finding the Right Balance”