A top bank regulator issued a criticism of the bipartisan Senate bank bill Wednesday, saying one contested provision would constitute a “serious policy mistake.”
Speaking at an event on banking in downtown Washington, Federal Deposit Insurance Corporation vice chairman Thomas Hoenig warned against a measure in the Senate-passed bank regulatory relief bill that would lessen capital requirements for big custody banks like State Street and the Bank of New York Mellon.
“These trusted custodians must remain pillars of strength and should be retaining capital, not reducing it,” Hoenig said in a speech at the Peterson Institute for International Economics.
Although he criticized that and other aspects of the pending bipartisan legislation, he favors it overall because it provides regulatory relief for regional and community banks.
Hoenig, regarded as one of the most hawkish bank regulators while being respected by Republicans and Democrats, is set to leave office soon. In Wednesday’s remarks, billed as a farewell speech, he warned Congress and regulators not to lower capital requirements for banks, which he argued are still too low.
Instead, he stated that the problem of too-big-to-fail banks is even bigger today than it was before the 2008 crisis.
The provision that he discussed specifically Wednesday is also one that Sen. Elizabeth Warren, D-Mass., has attacked in opposing the bipartisan Senate bill. It would allow for custody banks to maintain lower capital — meaning that they could be more indebted — based on the central bank reserves on their balance sheets.
The measure is meant to help banks like State Street, BNY Mellon, and Northern Trust, whose primary business is safekeeping and managing assets for other financial firms. But Warren and other opponents of the bill have claimed that it could also apply to other megabanks that aren’t primarily custodians, such as Citigroup.
The Senate bill would be the biggest change to the 2010 Dodd-Frank financial reform law since it was passed. It cleared the Senate with 17 Democratic votes, but House Republicans have said they insist on adding to it, a development that could imperil its odds of becoming law.
In his remarks, Hoenig also indirectly criticized another provision of the bill that would allow smaller banks to avoid the “Volcker Rule” that prevents banks from speculating with deposits insured by the federal government.
No banks should be exempted based on size, he said. Instead, banks should be given a presumption that they’re trading for customers’ benefit, rather than for their own, allowing them to avoid onerous reporting requirements.
