Summit Notebook

Exclusive outtakes from industry leaders

What if there were no “too big to fail”? Fed’s Hoenig has a vision

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USA/Democrats and Republicans alike on Capitol Hill say they want to toss out the concept of “too big to fail” in the financial regulation reform they are tussling over. That way if a financial firm is going to go under, it will go under, with no thought for a taxpayer handout.

Since the concept of “too big to fail” has yet to be erased by law, and its demise yet to be tested by a failing financial institution, it was interesting to hear how Kansas City Federal Reserve Bank President Thomas Hoenig envisioned the financial industry without that concept to lean on.

Looking back in time — “If you had a clear resolution process, and you had clear rules on leverage,” a domino-like string of large bank failures may have been less likely.

“And if the other institutions were sound but only had liquidity problems, the discount window could have been and would have been used in those instances,” he said at a Reuters Global Financial Regulation Summit.

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