A top bank regulator on Monday offered a compromise proposal for the largest too-big-to-fail financial institutions -- set up separately capitalized banking and investment units and in exchange, get significant relief from Dodd-Frank stress tests.
"We need regulatory reforms, but they must be grounded in capitalism that permits failure and improves economic efficiency," Federal Deposit Insurance Corp. vice chairman Tom Hoenig told the Institute of International Bankers' annual conference in Washington. "We can best achieve these goals if the largest banks were to partition their commercial and investment banking activities and also hold tangible equity capital at a level where bank owners -- not the taxpayer -- cover the cost of inevitable failures."
To help ensure that the separately capitalized divisions are maintained, the biggest banks would need to set up two corporate boards, one for each partitioned business. Commercial banks, under this approach, would need to hold minimum tangible equity of 10% of their assets, while investment banks' capital requirements could be "examined and calibrated," he said.
The move, Hoenig suggested, would reverse a trend in which the U.S. taxpayer-backed safety net has been allowed to cover a large financial institution's "expanded activities conducted within commercial banks," which gave an edge to investment banking operations affiliated with those companies.