Hoenig Says Separate Banks by Function, Not Size

Scores of bank economists and financial
journalists have leaped into action, post-Sanford Weill, to
speculate on the idiotic question of whether particular financial
firm A or B would have gone bankrupt without Glass-Steagall’s
repeal.
FDIC Commissioner and Glass-Steagall advocate Thomas
Hoenig, in a CNBC interview Aug. 3, attacked this foolishness
and, more importantly, the “anti-Wall Street” countergang to
Glass-Steagall: {Shrink} the too-big-to-fail banks. This is put
forward in new banking legislation by Sens. Sherrod Brown and
Bernie Sanders, Rep. Brad Miller in the House, and others
intimidated by Obama and Geithner against supporting the
Glass-Steagall restoration they know is needed.
In Hoenig’s discussion with three CNBC anchors, nobody
mentioned the Glass-Steagall legislation in Congress. But Hoenig
argued strongly against “breaking up banks by size”, and against
“higher capital requirements”, as solutions that will not work.
He also insisted that with current banking policy, massive
bailouts of big banks WILL be done again in another wave of
crisis, Dodd-Frank notwithstanding.
The only effective policy, Hoenig said, is to break up the
banks “by lines of business; break them up by function, not by
size”; and secondly, strictly restrict the “bank safety net” to
the commercial banking function, leaving everything else on its
own — let it “win-lose”, as he said, as opposed to commercial
banking’s “win-win”. These two policy pillars characterize
Glass-Steagall.
After discussing the superiority of the U.S. 20th-Century
model of commercial banking, to the European model of universal,
or “concentrated” banking, Hoenig dismissed the CNBC
interviewers’ usual arguments about AIG, Bear Stearns, etc.,
saying that the banking system as a whole is the subject. By
breaking down separation, he said, all financial institutions
were allowed to “leverage up” and speculate with much higher
risk. And since the collapse, claims of higher capital ratios are
largely bogus, he argued. The big banks are using their “bailout
borrowing discounts” to pile up contingent capital, Hoenig said,
while their real tangible capital remains no more than 5% of
assets (20:1 leverage) whereas “through most of the 20th Century”
it was 10%.