FDIC official backs bill to create banking firewall

He added that the legislation was necessary to prevent the FDIC from insuring banks' risky trading, which gives big banks a federal safety net that hedge funds and other investors don’t have.

“You do not want the safety net to be supporting these other trading activities because it gives them a competitive advantage,” he said.

Hoenig, who has long supported reinstating the 1933 Glass-Steagall Act to safeguard financial markets, said that a current bill in the Senate from a bipartisan group of lawmakers would meet those ends and allow banks’ investment trading to be “subject to the market’s discipline.”

“What I proposed, and what I think is reflected in the bills that have been introduced, is a separating out,” he described.

Last week, a bipartisan group of lawmakers in the Senate introduced legislation to revive the banking firewall, which was partially repealed in 1999 and has been blamed by some for contributing to the 2008 financial crisis. 

In addition to cordoning off banks’ investment and commercial activities, the bill, called the 21st Century Glass-Steagall Act, would prohibit new types of complex trading.

Hoenig made the remarks a forum on Thursday organized by the Main Street Alliance, an organization that advocates for local and small institutions.

Later in the panel, Massachusetts Institute of Technology professor Simon Johnson, who has also repeatedly pushed for stronger financial regulation, concurred that the legislation was necessary.

“Bringing back a modernized version of Glass-Steagall would contribute in a significant way to splitting the financial system into a safe part that you absolutely have to back up and a relatively dangerous part where people can make money or lose money,” he said.