Bank regulator warns of risks from rolling back Dodd-Frank

Bank regulator warns of risks from rolling back Dodd-Frank
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The outgoing vice chairman of the Federal Deposit Insurance Corporation (FDIC) on Wednesday warned against loosening key rules meant to keep banks stable in times of crisis.

Thomas Hoenig, who will leave the FDIC within weeks, defended the measures enacted after the 2007 financial crisis to force banks to hold higher levels of capital and limit leverage in his last speech as the bank insurer’s vice chairman.

Hoenig also warned that several U.S banks were too big to fail and that emergency measures meant to protect the economy from a collapsing major firm were insufficient.


“Too big to fail is getting more and more pronounced,” Hoenig said at an event hosted by the Peterson Institute. “You cannot have the footprint of these institutions and expect that you’re going to have one of them fail without catastrophe.”

Hoenig’s speech comes as financial regulators appointed by President TrumpDonald John TrumpJustice Department preparing for Mueller report as soon as next week: reports Smollett lawyers declare 'Empire' star innocent Pelosi asks members to support resolution against emergency declaration MORE and a bipartisan coalition of lawmakers seek to loosen the strict Dodd-Frank Act banking rules, passed in 2010 with the intent to prevent another financial crisis.

Critics of Dodd-Frank say they want to loosen the law’s burden on smaller lenders, such as credit unions and community banks in areas still struggling to recover from the 2007 crisis and recession.

Hoenig insisted that lawmakers and regulators shouldn’t forget the damage of the crisis and the reasons why stricter banking laws were enacted in the first place.

“Memories are short and with an improving economy, these laws and regulations — which early in the recovery are viewed as essential — are eventually recast as burdensome constraints that need to be eased or ended,” Hoenig said.

The Senate this month passed a bipartisan bill to exempt dozens of banks from stricter Federal Reserve oversight, and Trump-appointed regulators have announced plans to loosen a slew of rules on risky investments, leverage ratios and financial technology.

Hoenig said there were several areas where regulators could afford to let up on smaller banks and help local lenders hold their own against megabanks, including the Volcker Rule. The rule, named after former Fed Chairman Paul Volcker, banned banks from making certain risky investments with their own capital.

While several lawmakers and regulators across party lines have floated exempting smaller banks from the rule, Hoenig proposed allowing banks to operate under a “presumption of compliance” to reduce reporting burdens.

“With meaningful reporting relief in effect the burden would be eased, so rather than carve out exceptions, the Volcker Rule should continue to apply to all banks that benefit from deposit insurance,” Hoenig said.

Hoenig also panned the process through which a bank writes and submits for Fed approval a “living will,” a plan that details how a major firm could be disassembled by regulators upon failure without causing a credit panic.

He said the “cumbersome, political and misleading” process reveals no new information about a bank while giving the false impression that the firm could collapse without triggering a crisis. Hoenig said policymakers could scrap or reduce the frequency of living wills to ease burdens on banks.

But Hoenig panned proposals to give banks more leeway in meeting Dodd-Frank capital requirements and other rules meant to ensure liquidity. He opposed exempting custody banks from the supplemental leverage ratio and not counting reserves stored at Federal Reserve branches, both floated by Republicans and Democrats.

“Custody banks are integral to the financial system, highly interconnected to the capital markets, and relied upon as safe havens in times of stress,” Hoenig said. “These trusted custodians must remain pillars of strength and should be retaining capital, not reducing it.”