) - The president of the Federal Reserve Bank of Kansas City said at a conference Wednesday that the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama last July would "not improve outcomes," and that the United States must "must break up the largest banks."
Speaking at the Women in Housing and Finance conference in Washington, D.C., Thomas Hoenig, began by calling himself "a strong defender of free market capitalism," and then proceeded to say that "we must break up the largest banks."
Hoenig said that "too big to fail financial institutions" were "the greatest risk to the U.S. economy," since large banks' incentives to take risks hadn't changed and that the "regulatory factors that helped create" the credit crisis were still in place.
The largest banks could be broken up by "by expanding the
and significantly narrowing the scope of institutions that are now more powerful and more of a threat to our capitalistic system than prior to the crisis," he said.
As of December 31, the largest U.S, holding company by asset-size was
Bank of America, NA
, the largest banking subsidiary of
Bank of America
, which had $2.3 trillion in total assets; followed by
, with $2.1 trillion;
, with $1.9 trillion; and
Wells Fargo & Co.
, with $1.3 trillion in total assets, according to regulatory data supplied by SNL Financial.
Hoenig said that "bloated safety nets" and the "too big to fail" treatment of large financial institutions, including Bank of America, Citigroup,
American International Group
, "have become intertwined - the growth of one is linked to growth of the other, in an increasingly pernicious cycle."
In order to change the "repeating game" in which he said participants were continuing "to seek ever higher and more risky returns while 'banking' on the State to fund any losses in a crisis," Hoenig said options include "more effective regulation and supervision, higher levels of capital, and a resolution policy for too-big-to-fail institutions," however, the best option in his view is to limit the "risk activities" of "protected institutions," while expanding the Volcker Rule to "carve out business lines that are not essential to the basic business of commercial banking or consistent with public safety nets and then require that these lines be spun off into separate firms."
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.