Banks Need to Dump Brokers: FDIC Director

NEW YORK (TheStreet) - Federal Deposit Insurance Corp. director Thomas Hoenig wants U.S. banks out of the brokerage business.

Speaking before the Exchequer Club in Washington on Wednesday, Hoenig reiterated his May 2011 proposal that banks -- in return for the "public safety net" of deposit insurance and access to the Federal Reserve discount window -- banks "again be restricted from engaging in higher risk/return activities such as trading, creating derivatives, or other broker dealer activities."

Unlike the Glass Steagall Act of 1932, which was originally meant to completely separate traditional banks that gathered deposits and made loans from investment banks, under Hoenig's proposal, the banks would "continue to do trust and wealth management, and underwrite new issues of stocks and bonds, as those activities bring new capital to commercial firms."

After several decades during which traditional banks took on more and more securities-related roles, the Glass Steagall Act was repealed when the Gramm-Leach-Bliley Act was passed in 1999.

Under the Volcker Rule -- part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed by President Obama in July 2010 -- banks will be prohibited from most "proprietary trading," with plenty of exceptions contained under the Federal Reserve's proposed final rule, to allow banks to make hedge trade and engage in market making activities.

Hoenig's proposal would go further than the Volcker Rule, since banks "would not be allowed to conduct broker-dealer activities, make markets in derivatives or securities, trade securities or derivatives for either their own account or customers, or sponsor hedge or private equity funds."

While federal regulators have missed Dodd-Frank Act's July deadline for the Volcker Rule to be finalized and implemented, the writing is already on the wall, with an exodus of buy-side talent leaving Wall Street firms to strike out on their own.

Hoenig -- former president of the Federal Reserve Bank of Kansas City and a Federal Reserve Open Market Committee member from 1991 until 2011 -- says that his proposal would return deposit insurance and the Fed's discount window "to the purpose for which [they were] intended: protecting from systemic disruptions the payments system and the intermediation of funds from depositor to borrower that is commercial banking."

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