The largest banks are the worst capitalized and consequently the worst positioned for crises, a top financial regulator said Monday in a speech calling for tough rules on banks that could be in line for government bailouts.
“The largest banking firms insist that they are well capitalized. The evidence shows otherwise,” Federal Deposit Insurance Corporation Vice Chairman Thomas Hoenig said Monday at a banking conference in Washington, according to prepared text.
“The largest firms are the least well capitalized of any group of banks operating in the United States today, and they continue to pose a systemic risk,” he added.
Hoenig is regarded as one of the toughest critics of Wall Street megabanks, and has long called for stricter rules to make it less likely that big banks would receive federal assistance if they failed.
On Monday, Hoenig reiterated the need to maintain tough rules on big banks, and weighed in on several topics awaiting decision by financial regulators.
The FDIC and other agencies are working on a new rule that would apply a higher minimum capital level to the eight biggest banks. The requirement would go beyond the post-financial crisis capital rules that have caused big banks to roughly double their capital levels since 2009. Comments on the rule from the industry were due Monday.
Higher required capital ratios mean that a bank must rely more on equity and less on borrowing to finance its business. By relying less on borrowing, banks are better positioned to survive a downturn without becoming insolvent. Nevertheless, banks are opposed to raising minimum capital ratios, saying that they cut into profitability and the ability to lend.
Hoenig on Wednesday dismissed arguments against higher minimum capital levels, and suggested that the main capital requirements implemented by regulators fall short because they rely on “unreliable” assumptions about the riskiness of different assets.
Hoenig, a former president of the Federal Reserve Bank of Kansas City, also drew attention to the growth in leveraged lending, a development that regulators warned banks about in recent years. Last year saw $800 billion in new leveraged loans, which are junk bonds often issued to finance takeovers of indebted companies.
He also criticized bank opposition to the Volcker Rule. The Volcker Rule, which limits banks’ ability to engage in speculative trading for their own profit with deposits insured by the FDIC, was created as part of the 2010 Dodd-Frank financial reform law. Hoenig called the rule “afirst, modest step to address” possible bank bailouts through the FDIC.
