One of the top regulatory critics of Wall Street has proposed regulatory relief for community banks, one that would exempt traditional banks from some strict rules while maintaining tough reforms on banks with complicated and risky lines of business.
Federal Deposit Insurance Corporation Vice Chairman Thomas Hoenig said Wednesday in a speech in Washington that regulators might define big banks that are subject to added regulation by activity and complexity, not just size.
Doing so could give relief to dozens of banks that are regulated as big banks under the current rules even though they are generally viewed as large regional banks, not megabanks likely to threaten the U.S. economy or require a bailout in case of a failure. They effectively qualify as big banks under the 2010 Dodd-Frank financial reform law, which sets the cutoff at $50 billion in assets.
Hoenig said Wednesday that the need for relief from burdensome regulations is “legitimate,” but “can only follow if we are confident in the durability of the financial industry.”
He then suggested that banks might be given relief if they engage in no trading for profit and hold only a small amount of derivatives needed to hedge customers’ exposure to interest rate or foreign exchange rate movements.
Those banks would be exempt from added capital rules and stress tests, among other regulations.
“For the vast majority of commercial banks that stick to traditional banking activities, and conduct their activities in a safe and sound manner with sufficient capital reserves, the regulatory burden should be eased,” Hoenig said, according to prepared remarks.
For banks that continue with deals that could set up the risk of a bailout, he said, the “additional regulatory burden is theirs to bear.”
Hoenig estimated that about 400 of the 6,500 commercial banks would not meet his criteria. Only 90 of the very small banks with less than $250 million in assets would not qualify for relief.
Hoenig, formerly the president of the Federal Reserve Bank of Kansas City, is one of the toughest critics of Wall Street practices in the U.S. regulatory system. While he is admired by liberals concerned about the possibility that banks would be considered “too big to fail” during a crisis, he also earned the favor of Republicans for his criticisms of the Fed’s easy-money policies during his time at the Fed.
Members of Congress are working on legislation to provide relief for community banks.
Those efforts, however, have been slowed by the opposition of liberal members, including Sen. Elizabeth Warren, D-Mass., of any legislation that could become a vehicle for loosening rules on megabanks.
Hoenig’s comments suggested a way forward. He also warned, however, that the “Volcker Rule” requiring banks to separate speculative trading from insured deposits should not be lifted for community banks, many of which have no such trading activities.
