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FDIC's Hoenig lauds Republicans' regulatory reform, slams Volcker rule repeal efforts

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FDIC's Hoenig lauds Republicans' regulatory reform, slams Volcker rule repeal efforts

Republicanshave cited FDIC Vice Chairman Thomas Hoenig's research in support of the FinancialCHOICE Act, but Hoenig himself is not all that supportive.

In aninterview with S&P Global Market Intelligence, Hoenig lauded the Republicanexercise generally but expressed unease about eliminating the Volcker rule, whichprohibits proprietary trading among commercial banks. Hoenig said repealing therule would be "competitively unfair."

"What[banks would be] doing is speculating with insured deposits with a taxpayer backdrop,"Hoenig said.

He saidproprietary trading operations at commercial banks would increase risk to both theFDIC's insurance fund and the institution. In preparation of the Volcker rule, mostlarge banks shuttered proprietary trading operations. A repeal of the Volcker rulewould unfairly favor commercial banks over nonbanks, Hoenig said.

"[For]a midtier broker/dealer anywhere in this country who is not affiliated inside abank, they have a competitive disadvantage because their costs of funds are higher,"Hoenig said.

Lastyear, Hoenig unveiled his own proposal that offered regulatory reform if a bankmaintained an equity-to-assets ratio of at least 10% and held very few derivativepositions, among other requirements. The proposed Republican legislation offersrelief in exchange for the 10% leverage ratio alone.

The proposedrelief offered by Hoenig and the GOP differs greatly, as well. The GOP legislationcovers tremendous territory, offering banks regulatory relief for meeting a 10%leverage ratio, rolling back various provisions from the Dodd-Frank Act, reformingthe CFPB and requiring cost-benefit analyses for all financial regulation, amongother provisions. Hoenig's proposal more narrowly focuses on banks, offering relieffrom risk-based capital rules, call report filings, appraisal requirements and shortexamination cycles if banks hit the 10% leverage ratio and other criteria.

Froma practical perspective, analysts do not expect the Republican legislation to moveforward in the current Congress, especially considering the impending presidentialelection. However, in a July 11 note, Isaac Boltansky, an analyst for Compass PointResearch & Trading, said the bill could set the tone moving forward.

"Whilethere is no path to passage for this package as currently constructed, we believecertain provisions could reemerge in the next Congress," Boltansky said inthe note.

WhileHoenig's proposal requires banks to have effectively zero trading operations inexchange for relief, and Republicans would allow banks to restart their proprietarytrading operations by nixing the Volcker rule, the FDIC vice chairman did laud thelegislation for starting a debate.

"Ithink it's a very worthwhile exercise to put that out there and have a discussionaround where your capital level is for regulatory relief," Hoenig said.

Calibratingthat capital level could prove tricky. The Republicans use the total leverage exposureas developed by the Federal Reserve's supplementary leverage ratio, but Hoenig saidassets as calculated under an international accounting standard would work better.In any case, the 10% requirement under both Hoenig's and the GOP's proposals wouldlikely require significantly more capital for the nation's largest financial institutions— should they seek regulatory relief.

Hoenigpublishes the GlobalCapital Index, an analysis that highlights the inadequacy of the Tier 1 capitalratio under Basel III, a new set of standards launched after the 2008 crisis. Hoenigprefers a total leverage exposure calculation that does not allow banks to risk-weightassets, a practice that some have attributed as a contributor to inadequate capitallevels in the crisis.

"Ithink these institutions are still undercapitalized," Hoenig said. "Youcan get [more capital] with careful analysis … in a non-panic way. Or, we can waituntil the next panic, find out that we're too short of capital and then go throughthis process again of saying, 'We need more capital.' I prefer the former to thelatter."