A top regulator on Monday proposed replacing post-crisis banking rules by partitioning megabanks, a partial throwback to the Depression-era Glass-Steagall law that divided traditional banking from investment banking and insurance.
Thomas Hoenig, the vice chairman for the Federal Deposit Insurance Corporation known as a staunch advocate of ending “too-big-to-fail” in banking, on Monday suggested dividing traditional banks from investment banks, insurance companies and hedge funds within the corporate structure of megabanks, and then releasing the parent companies from many requirements they face currently under the 2010 Dodd-Frank law.
Hoenig’s proposal would go much further than existing rules in terms of separating non-bank financial activities from deposit-taking banks that receive deposit insurance and other government guarantees, in a bid to reduce bailouts. Yet it would also simplify bank regulation.
Although Hoenig is in no position to advance his plan through Congress, in the past his ideas have show up later in legislative proposals. In 2015, he proposed deregulating banks that met certain restrictions, including high capital requirements. This year, House Republicans are expected to advance a bill allowing banks that meet a certain capital requirement to opt out of Dodd-Frank rules.
Speaking Monday before an audience of bankers in Washington, Hoenig warned that Dodd-Frank rules are “burdensome for all banks, but especially smaller banks.” He said “the legislation also has served to enshrine too-big-to-fail for the largest, most complex universal banks, providing them with a powerful competitive advantage.”
In Hoenig’s vision, today’s megabanks would remain intact at the parent company level. But their traditional banking and non-traditional banking components would be separated into two intermediate holding companies and the parent company would issue a tracking stock for the nontraditional banking holding company. That way, it could be spun off or shuttered separately from the deposit-taking bank if it ran into trouble, sparing the payments system from the threat of a disruption.
If that partition took place, Hoenig suggested, banks could be spared from requirements including stress tests, living wills and some liquidity rules.
In theory, the trade-off could appeal to both conservatives and liberals. Dennis Kelleher, the head of the pro-regulation nonprofit group Better Markets, said in a statement that Hoenig’s “proposal deserves the widest consideration by all those in public office with the public duty to protect America’s families from another financial and economic catastrophe like 2008.”
Hoenig’s plan to divide bank could complement President Trump’s campaign proposal to reinstate a form of Glass-Steagall. Although the administration has mostly ignored that campaign plank since taking office, White House press secretary Sean Spicer said last week that Trump still wants to bring back the law.
Hoenig also has been reported as a possible candidate for the top regulatory position at the Federal Reserve, a slot for which Trump has yet to name a candidate.
