In a speech titled “Can We End Financial Bailouts?” to the Boston Economics Club on May 7 and posted on the website of the Federal Deposit Insurance Corp., FDIC Vice-Chairman Thomas Hoenig answered, essentially, “No, we can’t, because Congress hasn’t separated the banks with Glass-Steagall.” He also bluntly cleared away much of the hype about Dodd-Frank and the changes which many people credulously believe it has imposed on the big banks.
On those big banks, he said they are larger, more complicated, and more interconnected than in the 2007-08 crash. The eight largest banks assets equal 65% of GDP. Their average derivatives exposure of $60 trillion is 30% larger than in 2007. They are also more complex. “They have used the safety net subsidy to support their expansion across the globe. They have further combined commercial, investment banking, and broker-dealer activities. There have been no fundamental changes in the wholesale funding markets, in the reliance of bank-like money market funds, or in the use of repos, which all are major sources of volatility in times of financial stress.”
And they are also still wildly overleveraged, Hoenig said, with an average leverage ratio for the biggest eight of 22:1 despite the hyping of all the capital increases they have supposedly made.
By contrast, “Smaller regional banks are smothering under layers of new regulations even though they are holding significantly higher levels of capital than the largest banking and financial firms”; the smaller regional and community banks’ average capital leverage is 12:1.
Bail-in, Hoenig said, is a bail-out of derivatives counterparties (“qualified financial creditors”). “Under Title II, unlike in bankruptcy [Title I], the Treasury is empowered to fund short-term creditors who, for example, would avoid becoming general [unsecured] creditors as they exit at the firm’s operating units—the broker dealers, insurance companies, finance companies, trading companies that remain open. This only serves to perpetuate too big to fail.” This is why the big banks want Title II, bail-in, he says. And the taxpayers are supposedly to be paid back by bank fees, but much [years] later.
Hoenig concluded by criticizing Congress for leaving the massive problem to the regulators: “To be sure, having regulatory agencies rather than legislators define the nation’s financial structure and business activities is less than ideal. In the end, legislating the separation of highly subsidized commercial banks from non-bank trading and similar activities might be the better choice.”