Outgoing Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig said insured depository institutions should not be exempt from rules restricting proprietary trading and urged policymakers not to offer supplementary leverage ratio relief to custody banks.
In his final public speech as vice chairman, Hoenig noted Congressional efforts to revise large swaths of the post-crisis Dodd-Frank law and raised concerns about some provisions that could harm the "resilience" of the banking system and the economy at large.
On the Volcker rule, Hoenig warned that while its application can be simplified, it should continue to apply to all banks with insured deposits. Hoenig expressed concern over proposals to exempt entire groups of banks from compliance, which the Senate's recently-passed bill would do for firms with under $10 billion in total assets. He added that the Volcker rule mitigates mispriced risks by preventing banks from using deposit insurance to fund speculative trading.
Asked by the press if he agrees with separately proposed legislation that would make the Federal Reserve the exclusive regulator of the Volcker rule, Hoenig said he could endorse one agency taking the lead as the "rule writer" but said the other agencies should still participate in a consulting role.
"We should have a voice in that," Hoenig said.
Hoenig also took aim at the Senate's proposal to allow custody banks to exclude central bank reserves when determining the supplemental leverage ratio, calling the provision a "serious policy mistake." He argued that given the interconnectedness of the custody banks, regulators should not relax any capital requirements.
Hoenig's departure begins a change in personnel at the FDIC. Martin Gruenberg's tenure as FDIC chairman ended in November 2017 but he has continued in the role while President Donald Trump's pick to replace him, Jelena McWilliams, waits for Senate confirmation. Once confirmed, McWilliams would become chair and fill Hoenig's spot on the board. Gruenberg could still serve on the board through Dec. 27, but recently said he has not yet decided whether to do so.
Similarly, Hoenig's term as an FDIC board member expires April 2, but he can remain on the board while the Senate works through McWilliams' confirmation. Hoenig told reporters March 28 that he will leave "soon," adding that he has no plans for what he will do after departing the FDIC.
The former Federal Reserve Bank of Kansas City president used his final speech in his current position to rehash his vision for an ideal bank regulatory structure: a 10% leverage ratio requirement that prioritizes the retention of equity. Hoenig blamed fears of raising the cost of capital for stymieing development of a higher bank leverage ratio.
Hoenig also reiterated his distaste for the regulators' living wills process, arguing that it does not properly account for the contagion of one bank failure to peer banks.
"Unfortunately, given the size and scope of these banks' activities and their global reach they remain too big to fail regardless of the paper exercise," Hoenig said.
Hoenig added that total loss-absorbing capacity rules distort accountability by promising creditors a way to get out of their positions in the event of a liquidity crisis at a given institution.