U.S. Fed’s Hoenig backs bank break-ups where needed

January 5, 2010

By Mark Felsenthal

ATLANTA, Jan 5 (Reuters) – A top U.S. Federal Reserve official on Tuesday backed stripping banks of risky operations, suggesting growing support for breaking up large firms to prevent excesses that could undermine financial stability.

At a meeting of top economists here, Kansas City Federal Reserve Bank President Thomas Hoenig voiced support for former Fed Chairman Paul Volcker’s recommendation that banks not be allowed to sponsor hedge or equity funds.

However, also like Volcker, Hoenig stopped short of calling for restoration of Glass-Steagall banking laws that barred large banks from affiliating with securities firms and engaging in the insurance business.

Hoenig said areas where firms engaged in risky trading or “gambling” for their own account should be separated from commercial banking activities, as Volcker had suggested.

He told a panel at an American Economics Association conference it was important to safeguard the commercial banking sector from the riskier practices once the sole domain of investment banks, given the sector’s importance to both the U.S. and global economies.

Glass-Steagall barriers were largely repealed in 1999, a high-water mark for deregulation. Some members of Congress have proposed reinstating them as part of comprehensive financial reforms aimed at fixing flaws that set the stage for the worst financial crisis since the Great Depression.

However, some influential lawmakers, including Senate Banking Committee Chairman Christopher Dodd, have said restoring the walls between investment and commercial banking activities is unlikely.

Hoenig, an experienced bank regulator, made clear he was not advocating such a big step.

“We have to go back and think of some of the reasons why this came about at these very large institutions — without changing the structure that eliminated Glass-Steagall — and the consequences of that,” he said.

A bill to overhaul financial rules approved by the House of Representatives in early December would allow regulators to force firms to restructure or break up in extreme cases.

The Senate is expected to work on its version of the bill early this year. The two versions would need to be melded and approved by both chambers before the president could sign them into law.

Hoenig, who cut his teeth as a bank regulator shuttering institutions during the banking crisis in the early 1980s, has been a persistent advocate of making it impossible for financial firms to become so large or interconnected that markets believe the government would bail them out rather than let them fail.

He joins Dallas Federal Reserve Bank President Richard Fisher in advocating breaking up financial institutions to curb risks to the broader system.

Breaking apart very large firms “is a fair thing to consider,” he said. (Reporting by Mark Felsenthal, Editing by Andrea Ricci)

((mark.felsenthal@thomsonreuters.com; Tel: +1 202 898 8329; Reuters Messaging: mark.felsenthal.reuters.com@reuters.net))

One comment

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Revoking Glass-Steagall set the stage for wild profits and high risk.

Why not reinstate Glass-Steagall, Senator Dodd? Because the people you really work for would like that?

Posted by breezinthru | Report as abusive