Top banking regulator Thomas Hoenig announced his retirement Friday, shortly after issuing a warning that his colleagues are making a mistake that would increase the chances of another financial crisis.
Hoenig, the Federal Deposit Insurance Corporation vice chairman, said he’d leave office Monday.
Having served since 2012, Hoenig was headed out the door soon anyway. President Trump’s nominee to head the FDIC, Jelena McWilliams, would have taken his spot on the commission’s board of directors. McWilliams’ nomination awaits full Senate consideration.
But Hoenig made the most of the announcement by accompanying it with a warning that other regulators were making a mistake in a recently announced effort to ease one bank capital rule.
The change would “make the financial system less resilient and to make another financial crisis likelier and more severe,” Hoenig wrote in an op-ed published in the Wall Street Journal with Sheila Bair, a previous chairman of the FDIC.
The rule in question requires banks to maintain a certain level of capital relative to their assets. In other words, it limits banks from becoming highly leveraged, or indebted, the way they were before the financial crisis.
The post-crisis bank regulations set a number of different capital rules on banks. The leverage ratio being discussed is one of the broadest and most simple. Unlike other rules, it doesn’t weigh the riskiness of different assets in its calculation of the capital requirement, meaning that it doesn’t distinguish between, for example, mortgage-backed securities and cash.
Big banks have said, though, that it effectively penalizes them from holding safe assets, such as deposits at central banks. And regulators at the Federal Reserve and Office of the Comptroller of the Currency have said that the specific leverage ratio was never meant to become the binding rule, as it has for the biggest banks.
Hoenig and Bair argued against changing the rule on the grounds that banks are highly profitable now, and that they would simply pass any freed-up money on to their investors. Then, during the next crisis, they be more vulnerable to failure.
Hoenig has been in the business of regulating banks for decades. Prior to joining the FDIC, he worked for years at the Federal Reserve Bank of Kansas City, eventually becoming its president and voting on matters of monetary policy.
